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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:

  • Owned the home for at least two years (the ownership test), and
  • Lived in the home as your main home for at least two 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.


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 Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Sale of your main home.
  3. Continue with the interview process to enter all of 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 (Form 1040) Capital Gains and Losses, 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 Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Rent or Royalty Income in the Federal Quick Q&A Topics menu to expand, then click Real estate rental income.
  3. Click + Add Schedule E, Pg 1 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Rental Income - Depreciation, click Yes.
  6. If the asset was placed in service before 1987, 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).
  7. Click Step-by-Step Guidance, then proceed through the depreciation questions.
  8. On the screen titled Depreciation - Disposed, enter the Date sold (date no longer used for business/investment/rental purposes), then click Continue.
  9. On the screen titled Asset Sale - Gain or Loss, click Modify, select Schedule D - Home Sale Worksheet, then click Continue.
  10. 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 Federal. On smaller devices, click the menu icon in the upper left-hand corner, then select Federal.
  2. Click Investment Income to expand, click Gain or loss on the sale of investments to expand, then click Sale of your main home.
  3. 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 (Form 1040), Line 13. Also, please be aware of the depreciation fields on the screen titled Sale of Main Home - Basis of Home.


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 five 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 Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Rent or Royalty Income in the Federal Quick Q&A Topics menu to expand, then click Real estate rental income.
  3. Click + Add Schedule E, Pg 1 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of 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. 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 Supplemental Income and Loss 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 Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Rent or Royalty Income in the Federal Quick Q&A Topics menu to expand, then click Real estate rental income.
  3. Click + Add Schedule E, Pg 1 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.

After completing the interview for the disposition of the rental property, this transaction will appear on Form 4797 Sales of Business Property as a gain. The full gain will be considered taxable at this point. You will then enter this exclusion amount as a separate transaction on Form 4797.

To enter the Section 121 Exclusion amount on Form 4797:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Investment Income in the Federal Quick Q&A Topics menu to expand, click Gain or loss on the sale of investments to expand, then click Ordinary gain or loss (Form 4797).
  3. Click + Add Sale of Business Property to create a new copy of the form or click Edit to review a form already created.
  4. Click Quick Entry to scroll down to answer all applicable questions or click Step-by-Step Guidance to proceed with the program interview questions.
  5. Enter "Section 121 Exclusion" as the Asset description, then click Continue.
  6. On the screen titled Asset Sale - Type of Property, select an item from the the Type of property drop-down, check Check here if you are reporting a Section 121 exclusion to indicate you are reporting a Section 121 Exclusion, enter an amount if applicable, then click Continue.
  7. The program will proceed with the interview questions for you to enter or review the appropriate information.

Note. 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.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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