Qualified use vs. non-qualified use for main home: Sold property after 12 years ownership with 2-year rental period in between

So I can clear this up for you. The "non-qualified use" rules can be confusing, but your situation has a straightforward answer. Since you lived in the home for at least 2 out of the 5 years before selling, you meet the basic requirement for the $250,000 capital gains exclusion. However, the "non-qualified use" rule could limit this exclusion. Here's the good news - your rental period DOES NOT count as non-qualified use! This is because of the exception you mentioned. Non-qualified use doesn't include periods when the property was rented out AFTER you had already used it as your principal residence. Since you first lived in the home (2010-2018) before renting it out (2018-2020), and then moved back in again (2020-2022), the rental period falls under this exception. Think of it this way - the IRS is primarily concerned with people buying homes, claiming them as primary residences while actually using them as rentals, then selling for tax-free profit. Your situation shows genuine use as a primary residence both before and after the rental period. Based on what you've described, you should qualify for the full $250,000 capital gains exclusion, meaning your entire $119,000 gain would be tax-free.

I dealt with almost the exact same situation last year and initially got really confused about this too. I ended up using https://taxr.ai to analyze my situation after getting conflicting advice from two different CPAs. Their tool confirmed that when you live in a home first, then rent it out, then either sell it or move back in (which you did), that rental period is NOT considered non-qualified use under the exception in section 121(b)(5)(C)(ii)(I) of the tax code. They even sent me the exact IRS publication references that explain this exception. In your case, since you lived in the home before renting it out, the 2-year rental period isn't counted as non-qualified use, and since you met the 2-out-of-5-year ownership and use tests, your entire $119,000 gain should be tax-free. The tool saved me from unnecessarily paying taxes on about $85,000 of gains from my sale!

Just wanted to follow up about my experience with taxr.ai after asking about it earlier. I decided to try it for my similar situation with a condo I sold last year. I had a period where I rented my place out between living there, and I was getting totally different answers from everyone I asked. Their analysis was incredibly detailed! It walked through exactly how Section 121 applied to my specific timeline of ownership, explained why my rental period wasn't considered "non-qualified use" under the exception, and even calculated the exact portion of my gain that was excludable. They included references to specific IRS publications and even a relevant tax court case. The best part was having something concrete to show my tax preparer, who initially wanted to report part of my gain as taxable. After reviewing the taxr.ai analysis, she agreed with their conclusion and filed accordingly. Saved me thousands in unnecessary taxes!

After trying to call the IRS six times about a similar non-qualified use situation (kept getting disconnected after waiting 45+ minutes each time), I finally used https://claimyr.com to get through to an IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was honestly desperate because I had gotten different answers from two tax preparers about whether my rental period counted as non-qualified use. The Claimyr service got me connected to an actual IRS representative in about 15 minutes (after I'd wasted hours trying on my own). The IRS agent confirmed that periods of rental AFTER using the home as a principal residence are NOT considered non-qualified use under the exception in Section 121. She walked me through exactly how to calculate my exclusion and confirmed I qualified for the full amount. Having that official confirmation directly from the IRS gave me the confidence to file correctly.

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I was still stuck with my own non-qualified use question for a property I sold, so I figured what the hell, might as well try it. The service actually worked exactly as advertised. I set up my call for a Tuesday morning, and within about 20 minutes they had an IRS agent on the line. The agent confirmed everything that others have said here - when you use a property as your primary residence first, then rent it out, and then either sell it or move back in, that rental period is NOT considered non-qualified use under the exception in the tax code. This saved me from overpaying almost $14,000 in capital gains tax! My tax guy had been insisting I needed to prorate the exclusion based on the rental period, but the IRS agent specifically cited the exception and explained why it applied in my case. I'm honestly still shocked I was able to get a clear answer directly from the IRS.

Just to add more clarity to this thread - the specific language in the tax code (Section 121(b)(5)(C)(ii)(I)) states that non-qualified use does NOT include "any portion of the 5-year period preceding such date which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer's spouse." Basically, this means if you move out and rent your home after having lived in it, that rental period isn't counted against you. This exception exists specifically to help people who need to relocate for work or other reasons but aren't ready to sell their home immediately. So for the original poster, since you lived in the home first, then rented it out, then moved back in before selling, that 2-year rental period is completely excluded from the non-qualified use calculation. Your $119,000 gain should be completely tax-free as long as you meet the 2-out-of-5-year ownership and use tests (which you do).

Throwing in my 2 cents here - I think people are misunderstanding something important. The rule about periods AFTER using it as a principal residence only applies if you NEVER move back in before selling. In the OP's case, they moved back in, which restarts the clock and makes the previous rental period count as non-qualified use. At least that's how my accountant explained it to me.

I'm dealing with a similar situation and this thread has been incredibly helpful! I owned my home for 15 years, lived in it for the first 10 years, then rented it out for 3 years when I moved for work, and finally moved back in for the last 2 years before selling. Based on all the information shared here, especially the specific tax code reference in Section 121(b)(5)(C)(ii)(I), it sounds like my 3-year rental period wouldn't count as non-qualified use since I lived there first. This is such a relief because I was worried I'd have to pay capital gains on a portion of my $180,000 gain. The explanations about how this exception exists specifically for people who relocate for work or other reasons really makes sense. It's good to know the IRS recognizes that homeowners sometimes need flexibility without losing their tax benefits. Has anyone here actually filed their taxes using this interpretation and had it accepted without issues? I want to make sure I'm not missing anything before I finalize my return.

This is exactly the kind of situation where the non-qualified use rules trip people up, but you're actually in good shape! Based on your timeline, you should qualify for the full $250,000 exclusion on your $119,000 gain. The key is understanding that "non-qualified use" has a specific exception for periods that occur AFTER you've already used the home as your principal residence. Since you lived in your Chicago house from 2010-2018 before renting it out from 2018-2020, that rental period falls under this exception and doesn't count as non-qualified use. Think of it this way: the IRS created this exception specifically for situations like yours where homeowners need to relocate temporarily (for work, family, etc.) but aren't ready to sell immediately. They don't want to penalize genuine homeowners who rent out their property as a bridge solution. Your timeline shows: - 12+ years total ownership ✓ - 10 years total residence use ✓ - 2+ years residence use in the last 5 years before sale ✓ - Rental period that doesn't count as non-qualified use ✓ You meet all the requirements for the full exclusion. Your entire $119,000 gain should be tax-free. Just make sure you have good records of your occupancy dates in case the IRS ever asks for documentation.