Converting a rental property back to primary residence - tax implications for 2/5 year rule?

Thanks for the detailed response. Could you explain more about what you mean by allocating the gain between "qualified" and "non-qualified" use periods? Does that mean I can only exclude a portion of the capital gains?

Yes, exactly. The capital gain must be allocated based on the periods of qualified use (primary residence) and non-qualified use (rental). The allocation is typically based on the time periods. So if you owned the home for a total of 10 years (initial primary residence period + 8 years rental + 2 years primary again), but it was a rental for 8 of those years, you might only be able to exclude 20% of the capital gain under the 2/5 rule. But importantly, the IRS doesn't count rental periods AFTER your primary residence use as "non-qualified use." So if you move back in for 2 years before selling, the 8 years of rental in between your primary residence periods might not count against you for this calculation.

How exactly does this service work? Do you have to upload all your previous tax returns or property documents? Sounds interesting but I'm always cautious about sharing that kind of info.

Does it actually tell you the specific amount you'd owe in taxes under different scenarios? Like if I'm deciding between moving back in for 2 years vs selling now, would it show me the exact difference in tax liability?

You can upload documents if you want, but you don't have to share previous returns. You can manually enter information about purchase price, improvements, depreciation taken, and your timeline of residence vs. rental periods. It uses that data to calculate your potential tax liability. Yes, it absolutely compares different scenarios. That's actually what I found most helpful - it showed me the tax implications of selling now versus moving back in for exactly 2 years versus doing a 1031 exchange. It breaks down ordinary income tax from depreciation recapture separately from capital gains tax so you can see the full picture.

Wait, this is an actual service that gets you through to the IRS? I thought it was impossible to reach them these days. How does it actually work? Do they just have some special phone number or something?

No way this works as advertised. I've been trying to get through to the IRS for months about my rental property issues. If this actually worked, everyone would be using it. Sounds like a scam trying to collect personal info.

It's not a special phone number - they use technology to navigate the IRS phone system and wait on hold for you. When they get someone from the IRS on the line, they call you and connect you directly to the agent. It's completely legitimate. I was super skeptical too at first. But when you consider how much money is at stake with rental property tax decisions, spending a little to actually talk to the IRS and get definitive answers seemed worth trying. They don't ask for any personal info beyond your phone number to call you back when they have an agent on the line.

That's a great point I hadn't considered. My original home is in Washington state and I've been living in California. Would I be taxed based on the state where the property is located or my residence at time of sale?

You'll be taxed by the state where the property is located regardless of your residency. So if the property is in Washington (which doesn't have state income tax), you'd only pay federal capital gains. But if you're a California resident when you sell, California will also want to tax that gain since you're a resident there. There are credits for taxes paid to other states to avoid double taxation, but it gets complicated fast.

This can backfire badly - I tried the property management route and ended up with terrible tenants who trashed the place. The 10% fee the management company took hardly seemed worth it considering all the headaches. Sometimes a clean break is better financially and mentally.