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Even if you converted your main home into a rental property (or vice versa), you may be able to exclude some of the gain on the sale of your home if you meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
  1. Owned the home for at least 2 years (the ownership test), and
  2. Lived in the home as your main home for at least 2 years (the use test).

If you meet these tests, how you report this transaction on your tax return will be based upon whether the home was your main home or a rental home at the time of the sale. If at the time of the sale, this home was your main home, see the section Main Home below. If this home was a rental property at the time of the sale, see Rental Home below.

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Main Home

Even though the home may have been your main home at the time of sale, you still need to determine if you have any rental income to claim on your current year tax return. If during the tax year, this home was a rental home which generated income and was then your main home prior to sale, you will need to report the income from the portion of the year the home was a rental home. To report the rental income and the sale of your main home, see Current Year Rental Income below. Otherwise if there is no rental income to report on your tax return, follow the steps below to enter your transactions:
  1. From within your TaxAct® return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Investment Income to expand the category and then click Gain or loss on the sale of investments
  3. Click Sale of your main home
  4. The program will proceed with the interview questions for you to enter or review the appropriate information
Be sure to click the Info Icon on the screen titled Sale of Main Home - Date Acquired/Sold to determine how many days you should enter for the Period of Nonqualified Use, if applicable. Depending on the number of days you entered for the Period of Nonqualified Use, if any, you may have a taxable gain to report on Schedule D and Form 1040, Line 13. Also, please be aware of the depreciation fields on the screen titled Sale of Main Home - Basis of Home.

Unrecaptured section 1250 gain is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose. Based on your entries, the TaxAct program will fill out the Unrecaptured Section 1250 Gain Worksheet. This amount will appear on Schedule D, Line 19.


Current Year Rental Income

If the property qualifies as your main home at the time of sale, but you have rental income to report for the current year:
  1. From within your TaxAct return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Rent or Royalty Income to expand the category and then click Real estate rental income
  3. Click Add to create a new copy of the form or click Review to review a form already created
  4. Proceed past the Income and Expense sections until you reach the screen titled Rental Income - Depreciation, then click Yes
  5. If the asset was placed in service after 1986, click No, then Yes (If you had previously entered an asset here, you will be brought to the Review screen instead. In this case, you would either click Add or Review).
  6. Select Step-by-Step Guidance
  7. Proceed through the depreciation questions until you reach the screen titled Depreciation - Disposed
  8. Enter the date of disposal (date no longer used for business/investment/rental purposes) and click Continue
  9. Proceed to the screen titled Asset Sale - Gain or Loss which asks whether you would like to Continue or Modify
  10. Click Modify
  11. Select Will report on either the Schedule D Home Sale Worksheet... and click Continue.
  12. Finish answering the interview questions about the rental property

After you have entered the disposition of the rental home, you will want to fill out the Schedule D Home Sale Worksheet. To access this worksheet:
  1. Click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Investment Income to expand the category and then click Gain or loss on the sale of investments
  3. Click Sale of your main home
  4. The program will proceed with the interview questions for you to enter or review the appropriate information

Be sure to click the Info Icon on the screen titled Sale of main Home - Date Acquired/Sold to determine how many days you should enter for the Period of Nonqualified Use, if applicable. Depending on the number of days you entered for the Period of Nonqualified Use, if any, you may have a taxable gain to report on Schedule D and Form 1040, Line 13.Also, please be aware of the depreciation fields on the screen titled Sale of Main Home - Basis of Home.

Per IRS Publication 523, page 16:

Unrecaptured section 1250 gain. This is the part of any long-term capital gain from the sale of your home that is due to depreciation and cannot be excluded. To figure the amount of unrecaptured section 1250 gain to be reported on Schedule D (Form 1040), you must also take into account certain gains or losses from the sale of property other than your home. Use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions for this purpose.Based on your entries, the TaxAct program will fill out the Unrecaptured Section 1250 Gain Worksheet. This amount will appear on Schedule D, Line 19.

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Rental Home

At the time of sale this home was considered a rental home. However, if you still meet the ownership and use tests based upon the 5-years preceding the date of sale, you may qualify to exclude some of the gain on the sale. If these tests are met, see Reporting the Exclusion below. Otherwise follows the steps below to enter the sale of this rental home into your return.
  1. From within your TaxAct return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Rent or Royalty Income to expand the category and then click Real estate rental income
  3. Click Add to create a new copy of the schedule or Review to review a schedule already created
  4. The program will proceed with the interview questions for you to enter or review the appropriate information

You will come across a screen titled Rental Income - Disposal. Since you have permanently taken this property out of business/rental use, then you would want to select Yes when the program asks if you disposed of your interest in this property.

Once you indicate you have disposed of your interest in this property, you will want to properly indicate this disposal within the depreciation section, also, if you had been depreciating the rental home. The depreciation section will come immediately after you enter your rental income and expenses (if you have already entered your applicable income and expenses, then you can click No on those screens to pass those sections and move directly on to depreciation).

Once you get to the depreciation section, click Review next to the rental property. Within the depreciation entries, you will come across a screen titled Depreciation - Disposed, where you will want to enter the Date Sold/Disposed. By entering this date on this screen, the TaxAct program will automatically calculate the partial year depreciation for you.


Reporting the Exclusion

You will complete Schedule E to report the current year rental income and expenses. During the interview for this income, you will be able to indicate the property has been disposed. The program will then proceed with questions to report the sale of this property.

  1. From within your TaxAct return (Online or Desktop), click on the Federal tab. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Rent or Royalty Income to expand the category and then click Real estate rental income
  3. Click Add to create a new copy of the schedule or Review to review a schedule already created
  4. The program will proceed with the interview questions for you to enter or review the appropriate information
After completing the interview for the disposition of the rental property, this transaction will appear on Form 4797 as a gain. The full gain will be considered taxable at this point. You will then need to complete the Taxable Gain on Sale of Home worksheet in IRS Publication 523 to determine the portion of the gain that qualifies to be excluded from income as a Section 121 Exclusion. You will then enter this exclusion amount as a separate transaction on Form 4797. To enter the Section 121 Exclusion amount on Form 4797 follow the steps below:
  1. From within your TaxAct return (Online or Desktop), click on the Federal tab
  2. Click Investment Income to expand the category and then click Gain or loss on the sale of investments
  3. Click Ordinary gain or loss (Form 4797)
  4. Click Add to create a new copy of the schedule or Review to review a schedule already created
  5. Enter “Section 121 Exclusion” as the description.
  6. Select the property type (i.e. Depreciable real property sec 1250)
  7. On the screen titled Asset Sale - Type of Property, check the box to indicate you are reporting a Section 121 Exclusion
  8. If using Quick Entry View or the Forms you must check the box for Part I or the exclusion will not be reported on Form 4797
  9. The program will proceed with the interview questions for you to enter or review the appropriate information

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