Can someone explain the difference between the two home exclusion examples on the IRS website?

The difference comes down to how the IRS treats periods of "qualified use" versus "non-qualified use" for the principal residence exclusion (the $250,000/$500,000 capital gains exclusion when selling your home). The key distinction in those examples is exactly what you spotted - Taylor lived in the home first (qualified use) before renting it out, while Finn rented it out first (non-qualified use) before living in it. The IRS gives preferential treatment to situations where the rental period comes after using it as your main home. This is actually explicitly addressed in the tax code - periods of non-qualified use AFTER using it as your principal residence are not counted against you. But non-qualified use BEFORE living in it does affect your exclusion. For your specific situation, you'll likely qualify for the full exclusion since you lived in it first before renting it out (like Taylor). The rental period after your initial residency doesn't count against you, especially since you moved back in afterward.

I struggled with this exact same question last year! I found this tool called taxr.ai (https://taxr.ai) that helped me decipher the IRS rules about home sale exclusions. I uploaded the IRS publication and my specific situation details, and it broke everything down for me. The key thing I learned was that the timing really matters - when you use it as a rental versus a primary home makes all the difference. The tool explained that non-qualified use periods after you've established it as your primary residence aren't counted against you (which is why Taylor got the full exclusion). It helped me figure out that I could get about 80% of the exclusion in my situation, which was way better than what my uncle (who thinks he's a tax expert) told me!

Following up on my question about taxr.ai - I decided to try it out for my rental property situation and WOW, I'm glad I did! I had been renting out my condo for 3 years after living in it for 2 years initially. The tool showed me that I qualify for the full exclusion if I sell within the next 2 years, which is about $68,000 in tax savings I would have missed! It also gave me a timeline showing exactly when my eligibility would change. What impressed me most was how it explained the "non-qualified use" rule in plain English - the exact thing that was confusing the original poster. Turns out the IRS doesn't count rental periods AFTER you've lived in the home against you, but they do count rental periods BEFORE you establish it as your primary residence.

If you're still confused about the IRS examples or trying to figure out if you qualify for the home sale exclusion, you might want to talk directly to the IRS. I wasted hours on hold trying to get clarification about my own situation until I found this service called Claimyr (https://claimyr.com). They basically hold your place in the IRS phone queue and call you when an agent is about to answer. I was super skeptical but there's a video showing how it works: https://youtu.be/_kiP6q8DX5c I finally got a definitive answer about my rental property situation from an actual IRS representative instead of trying to interpret their confusing examples. The agent walked me through exactly how the qualified vs. non-qualified use periods worked in my case.

Well I have to eat my words about Claimyr! After expressing my skepticism, I decided to try it anyway since I had a complicated home sale exclusion question similar to the original post. It actually worked exactly as advertised. I got a call back in about an hour, and suddenly I was talking to an actual IRS agent. The agent confirmed what others here were saying - the timing of when you use the property as a rental vs. primary residence makes all the difference. In my case, I had a unique situation where I lived in my house, then rented it out, then moved back in before selling. The agent walked me through exactly how the calculation would work and confirmed I qualify for the full exclusion. Having this straight from the IRS gives me total peace of mind for my upcoming sale.

I think I can simplify this whole home exclusion thing based on my experience: 1) You need to live in the home for 2 years total out of the 5 years before selling 2) If you rent it out AFTER establishing it as your primary residence, those rental periods don't count against your exclusion 3) If you rent it out BEFORE establishing it as your primary residence, those rental periods DO count against your exclusion So in the IRS examples, Taylor lived in it first, then rented it = full exclusion. Finn rented it first, then lived in it = partial exclusion. Hope that helps! I just went through this with my duplex that I partially rented.

Does anyone know if there are exceptions to these rules? I'm military and we've rented our house out during deployments. Not sure if the IRS treats military situations differently with the home sale exclusion.

Thanks to everyone who's contributed to this thread - it's been really helpful! I'm in a similar situation to the original poster and was getting confused by the IRS examples too. Based on what I'm reading here, it sounds like the key is whether you establish the property as your primary residence BEFORE renting it out. The IRS basically rewards you for using it as your actual home first, rather than treating it as an investment property from day one. For @Amara Okafor - your situation sounds like you should qualify for the full exclusion since you lived in it for 18 months first before renting it out, and you're back living in it now. The rental period in the middle shouldn't hurt you based on what others are explaining here. One thing I'm still wondering about though - does it matter HOW LONG the rental period was? Like if someone lived in their house for 2 years, then rented it for 10 years, then moved back in for a few months before selling, would they still get the full exclusion as long as they meet the 2-out-of-5 year test at the time of sale?