Overview

If the taxpayer's primary residence was also used as a rental, you must first see if the taxpayer qualifies to exclude all or part of any gain from the sale of their main home. The taxpayer's main home is the one in which they live most of the time.

Ownership and Use Tests

To claim the exclusion, the taxpayer must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, the taxpayer must have:

• Owned the home for at least two years (the ownership test)

• Lived in the home as their main home for at least two years (the use test)

Periods of Non-qualified Use

In most cases, gain from the sale or exchange of the taxpayer's main home will not qualify for the exclusion to the extent that the gains are allocated to periods of non-qualified use. Non-qualified use is any period after 2008 during which neither the taxpayer nor their spouse (or former spouse) used the property as a main home with the following exceptions.

Exceptions

A period of non-qualified use doesn’t include:

1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date the taxpayer (or their spouse) use the property as a main home;

2. Any period (not to exceed an aggregate period of 10 years) during which the taxpayer (or their spouse) are serving on qualified official extended duty:

   • As a member of the uniformed services;

   • As a member of the Foreign Service of the United States; or

   • As an employee of the intelligence community; and

3. Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.​​

For more information on non-qualified use, see Publication 523.

Entering the Sale of Primary Residence

• On the HOME screen enter any applicable information.

• On line 10, enter the amount of depreciation allowed or allowable for business use.

Note  Even if no depreciation deduction was taken, the net profit or loss on the disposition of the property must be computed as if depreciation was actually taken. See Publication 544 for more information.

• Enter the number of days to calculate the Section 121 Exclusion.

• On the 4562 screen ONLY:

  • Enter the Date taken out of service IF NOT SOLD

  • Check the box Do Not Update to next year

    Caution  If you enter a property type, date sold, or sale price on the 4562 screen, it could double up the amount if you are reporting the sale on the HOME screen.

Property Partially Used For Business

Determine whether the space used for business during the 5 years before the sale is considered to be within the taxpayer's home or not. If the business or rental space was physically part of the living area of the taxpayer's home, such as a spare room used as a bed-and-breakfast bedroom or attic space used as a home office, the taxpayer's business usage doesn’t affect their gain or loss calculations.

Determine whether the business or rental space still counts as a business space. A space formerly used for business is considered residence space if ALL of the following are true:

• the taxpayers weren’t using the space for business or rental at the time they sold the property,

• the taxpayers didn’t earn any business or rental income from the space in the year they sold their home, and

• the taxpayers used the space as residence space for 2 years out of the 5 years leading up to the sale.

If all of these are true, the taxpayer's business usage DOESN’T affect gain/loss calculations.

Special Situations

In certain situations, the sale of the property must be treated as the sale of two separate properties. For example, the property sold is a farm, and the farmhouse meets both the ownership test and the use test, but the barn does not meet the use test. In this case, the selling price, selling expenses, basis, and the allowable Section 121 exclusion must be apportioned between the home itself and the business or rental portion.

Use the section Business or Rental Use of Home to enter the percentage of the property used for the business or rental. See the field help (F1) for details. When an entry is made in that field, Wks Home is produced in View/Print mode that shows the allocation of the gain or loss for personal and business use. The business portion is then carried to Form 4797 and/or Schedule D. The personal portion is carried to Wks 2119 to determine the taxable amount, if any.

Miscellaneous Section

Additional selections on the HOME screen may be needed in certain circumstances:

• Carry taxable gain to Form 4797

• Sales Price, Cost, Expense of Sale overrides.

• Do not carry taxable gain to tax return

• Does not qualify for exclusion (Carry gain to Form 8949/Schedule D)

• Recently widowed taxpayer eligible for MFJ exclusion

• Force exclusion or loss adjustment to be printed on Form 8949/Schedule D

• 1099-S was received

• Form 8824 screen number to which data should flow

See Publication 523 for more information.