Home Capital Gain Tax Question?

Say we lived in a home as our primary residence from June 1997 until June 2004, and then rented the home from July 2004 until June 2005. We then decide to sell the home at the end of our renters 1 year lease in June 2005. Are we still exempt from capital gains (up to the 500K limit) on the home since we lived in it for at least 2 out of the past 5 years although it was a rental home for the last year before it was sold?

TIA for any answers!

Based on everything I've read, the answer is YES. Hopefully someone who really knows the tax laws inside and out will reply.

yes, but Dave M knows best.

I agree, with one exception. You'll have to report as gain any depreciation claimed during the rental period or during any other period of ownership.

Unlike other reporting of gain due to depreciation recapture, the entire transaction, if there is any gain to report, is reported on Schedule D.

You can find the info on this in IRS Publication 523. (PDF reader required.)

Thank-you everybody for confirming what I already thought. The reason I was asking this question is b/c I’m doing my taxes in Turbotax and there’s a bug in the program with its instructions on how to handle this situation. I wanted to make sure I wasn’t missing something before I called and paid for turbotax’s tax advice personnel to help me try and enter this info correctly in the program.

It turns out that I spoke to a phenomenal turbotax tax advisor who told me she was getting a lot of these similarly related calls. We walked through the program step by step using several different permutations, and low and behold the program does have a bug in it along with directions that are clear as mud in that section. She didn’t even understand the directions and thought they were contradictory.

After our conversation, she told me that I was absolutely right and that she would be requesting a patch update be sent out for the program. She gave me her direct line to call her back if I was still having problems with this before any patch could be sent out. Now that is phenomenal customer service! I’m going to write this rep up for a great job!

Thanks again for everybody’s replies!