Can I be disqualified for Section 121 exclusion even though I lived in my primary residence for 29 out of 31 years?

Thanks for the response, but I'm a bit confused. I thought any time the house was rented out counts as non-qualified use under the 2009 law changes? So wouldn't I have to calculate what percentage of my gain is taxable based on the ratio of non-qualified use period to the total ownership period? Also, does it matter why I rented it out (it was for a job relocation)?

The Housing Assistance Tax Act of 2008 created the "non-qualified use" rules, but they have specific exceptions. Any period of non-qualified use AFTER the last period when the home was used as a principal residence does count against you. However, your situation is different - you had a rental period and THEN moved back in. The law specifically doesn't count as non-qualified use any portion of the 5-year period that occurs after the last date the property was used as the principal residence. Since you moved back in and then lived there until sale, you're in good shape. And yes, renting because of job relocation strengthens your position further, as temporary absences due to employment changes are specifically exempted in the tax code.

How accurate was this service? I'm in a somewhat similar situation (though I rented my house for 3 years before moving back in), and my accountant is giving me conflicting info compared to what a realtor told me about capital gains.

Did they just look at the documents you sent them or did they actually help with filing too? I've got a house sale coming up next year with some rental history and I'm getting nervous about messing up the tax treatment.

The service was extremely accurate - they provided IRS code references for everything, and when I took their analysis to my tax preparer, he confirmed it was correct and followed it exactly. Their analysis even caught something my CPA initially missed regarding depreciation recapture on the rental period. They don't actually file your taxes for you - they just review your documents and provide a detailed analysis of your tax situation. You upload your relevant documents (sales documents, rental history, improvement receipts, etc.) and they analyze everything according to the current tax code. In my case, they explained exactly how to report the sale on my return and which forms I needed. They also highlighted that I needed to recapture the depreciation I had taken during the rental period at the 25% rate.

How long did it actually take to get through to someone? And were they actually knowledgeable about Section 121? I tried calling the IRS directly last year about rental property questions and the person I finally got had no clue and just kept reading generic info to me.

This sounds like a scam. Why would I pay a service to call the IRS when I can just call them myself? And how do they magically get through when regular people can't? Sounds suspicious.

I got connected to an IRS agent in about 55 minutes total. The service estimated it would take 1-2 hours, so it was actually faster than expected. And yes, the agent I spoke with was very knowledgeable about Section 121. I made sure to ask for someone familiar with home sale exclusions when the first agent answered. The service doesn't magically get through - they use an automated system that waits on hold for you. It works exactly like you're calling yourself, except you don't have to sit there listening to the hold music. They call you when a human picks up. I was skeptical too, but with tax filing deadlines approaching and needing a definitive answer about my specific situation, I was willing to try anything. They don't have any special access - they're just saving you from the hold time.

Thanks for the tip about documentation! I do have utility bills and mail going back years, plus my driver's license has always had that address except during the rental period. What kind of home improvements can I include in the basis? I did a kitchen remodel in 2012 and replaced the roof in 2019.

Both the kitchen remodel and the roof replacement would count as capital improvements that can be added to your basis. The basic rule is that if it's an improvement that adds value to your home, prolongs its useful life, or adapts it to new uses, it counts. Keep in mind that repairs (fixing something that's broken) generally don't count as capital improvements. But full replacements or upgrades typically do. So your roof replacement definitely counts, and kitchen remodels almost always qualify. Make sure you have receipts for everything. If you don't have all the receipts anymore, even bank statements showing the payments to contractors can help establish your case.

Not the original poster, but I can share my experience. I rented my house for 3 years and had to recapture about $32,000 in depreciation when I sold (it was a fairly expensive property). At the 25% rate, that meant about $8,000 in taxes just for the recapture part. But that was WAY better than paying capital gains on the full $220k appreciation, which would have been more like $33,000 in tax (at my 15% long-term capital gains rate). So moving back in for 2 years before selling saved me about $25k in taxes.

This is really helpful - thank you for breaking down the non-qualified use rules so clearly! I've been reading IRS Publication 523 but it's pretty dense. Just to make sure I understand correctly: since I moved back in after the rental period and lived there continuously until sale, that 2-year rental period in the middle doesn't hurt my Section 121 exclusion at all? Also, regarding the depreciation recapture - I did claim depreciation on my tax returns during those rental years. Do you happen to know if there's a specific form I need to use when reporting this, or does it just go on the regular Schedule D? I want to make sure I don't miss anything when I file.

That's exactly right! Since you moved back in after the rental period and lived there continuously until sale, that 2-year rental period won't affect your Section 121 exclusion eligibility. You should be able to exclude the full $250K (or $500K if married filing jointly) from your capital gains. For the depreciation recapture, you'll report this on Form 4797 (Sales of Business Property), not Schedule D. The depreciation you claimed during the rental years gets "recaptured" and taxed at a maximum rate of 25%, which is generally higher than long-term capital gains rates but much better than ordinary income rates. Make sure to gather all your tax returns from the rental years so you can calculate the exact amount of depreciation you claimed. If you used tax software or a preparer during those years, they should have records of the depreciation amounts. The recapture amount will be the lesser of: (1) the depreciation you actually claimed, or (2) the gain on the sale attributable to the rental use period. Since this can get complex with the calculations, definitely consider having a tax professional review everything before filing, especially given the significant amounts involved.