Capital gain on a house I used to rent

Capital gain on a house I used to rent
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My parents purchased a home 5 years ago. We’ve rented that have for 4 years and we purchased it from them 1 year ago.

Will be need to pay capital gains for the sale of this home? We’ve lived in it for 5 of the last 5 years as our primary residence but only owned it for one of those 5 years


Hi, @Tet, and welcome to the community! Any chance you could wait another year before selling? People who live in their homes at least two of the previous 5 years can exclude up to $250,000 each (so $500,000 per couple) of home sale profits from their incomes. The ownership and use tests can be separate…in other words, you’ve already met the use test by living in the home 2+ years, so you just need to meet the ownership test by owning it another year, even if you rent it out.

Some people can get a partial exclusion if they can’t quite make the two year mark because of a work- or health-related move, unforeseen circumstances or other “facts and circumstances” you couldn’t have reasonably foreseen. You can see the details in IRS Publication 523.

This is a pretty valuable break, because otherwise you’d pay long-term capital gains taxes on your profit when you sell.

Hope that helps…let us know if you have any follow-up questions.