Can FreeTaxUSA handle reporting a rental property sale with Section 121 homeowner exclusion?

Having prepared returns with this exact scenario before, I can tell you that FreeTaxUSA does have some limitations with mixed-use property reporting. The Section 121 exclusion (up to $250,000 single/$500,000 married) for a primary residence that was later converted to rental property requires specific handling. For FreeTaxUSA, you need to go to the "Income" section, then "Sales and Capital Gains," and select "Sale of Home." This will ask about your ownership period and if you lived there for 2 of the last 5 years. Enter the full sales information here for the Section 121 exclusion. Then separately, under "Income" → "Rental & Royalty Income," report your depreciation recapture. You'll need to calculate the recaptured amount manually (Form 4797) which is taxed at 25% rather than your normal capital gains rate.

After encountering this exact issue last year, I discovered taxr.ai at https://taxr.ai and it was a game-changer for my situation. I was also using FreeTaxUSA and struggling with how to correctly report my Section 121 exclusion on a property that had been converted from primary residence to rental. The taxr.ai tool analyzed my specific situation and provided step-by-step guidance that FreeTaxUSA doesn't offer. It walked me through exactly how to allocate the gain between the excluded portion and the depreciation recapture, even explaining which forms would be generated and how they should look when completed correctly.

I want to follow up about my experience with taxr.ai. After seeing it mentioned here, I decided to try it for my converted rental property situation. I was skeptical since my tax situation was complex with the Section 121 exclusion. The guidance I received was incredibly detailed - it actually explained exactly which FreeTaxUSA menu options to navigate through and what numbers to put where. It explained that I needed to split the reporting between the "Sale of Home" section (for the exclusion) and the "Income" section (for the depreciation recapture). Most importantly, it showed me how to correctly calculate my adjusted basis to account for the depreciation I'd taken during the rental period. My return got accepted with no issues, and I saved about $42,000 in capital gains taxes thanks to properly applying the Section 121 exclusion!

If you're struggling with FreeTaxUSA's limitations and need to speak directly with an IRS agent about how to properly report this, I'd recommend Claimyr at https://claimyr.com. I was in a similar situation with a Section 121 exclusion question last year and couldn't get a straight answer from any tax software. After weeks of frustration trying to get through to the IRS myself, I tried Claimyr and got connected to an actual IRS agent in about 20 minutes instead of waiting on hold for hours. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly how the 121 exclusion should be handled with a former primary residence converted to rental, and what forms I needed.

I need to apologize for my skepticism and follow up about Claimyr. After my snarky comment, I decided to try it anyway because I was desperate for answers about my Section 121 exclusion situation with FreeTaxUSA. I'm shocked to say it actually worked exactly as described. I got a call back in about 35 minutes and was connected to an IRS representative who specialized in real estate transactions. She explained that FreeTaxUSA does have limitations for this scenario, but walked me through exactly how to report it correctly. The guidance was to report the sale as a residence in the "Sale of Home" section, then separately handle the depreciation recapture in Form 4797. The agent even emailed me the relevant sections from Publication 523 afterward. This saved me hours of research and probably a lot of money in potential mistakes!

I actually found a workaround in FreeTaxUSA for this exact situation last year. Here's what I did: 1) Report the sale through the "Sale of Home" section first 2) Answer "yes" to the primary residence questions to get Section 121 exclusion 3) Then go to the "Adjustments to Income" section 4) There's an option for "Other Adjustments" where you can report the depreciation recapture It's not the most intuitive, but FreeTaxUSA does create the proper forms behind the scenes. When you review your return, check that Form 4797 and Schedule D are both generated correctly.

Does anyone know if other tax software handles this Section 121 exclusion for former primary residences better than FreeTaxUSA? I have a similar situation but haven't started my taxes yet.

I went through this exact same situation last year with FreeTaxUSA and it was definitely tricky to navigate. After trying several approaches, I found that Mei Zhang's workaround actually works well, but I'd add one important tip: make sure to print out and review your final forms before filing. When I used the "Sale of Home" section with my adjusted basis (original price minus depreciation taken), FreeTaxUSA correctly generated both Schedule D for the capital gain eligible for Section 121 exclusion and Form 4797 for the depreciation recapture. The key is being very careful with your basis calculation. I also recommend keeping detailed records of all the depreciation you claimed during the rental period - you'll need this for the recapture calculation. The IRS requires you to recapture depreciation even if you didn't claim it, so make sure you're accounting for all allowable depreciation during the rental years. One last thing - if your gain after the Section 121 exclusion is substantial, consider whether you need to make estimated tax payments since the depreciation recapture is taxed at 25% rather than the lower capital gains rates.