I'm helping some relatives with taxes, and am looking at a situation I'm not completely familiar with. The primary residence was owned for 7 years, but after living there for 5 years, they moved into another home that they purchased. The market was still recovering so they decided to wait until prices rose to their purchase price before selling and rented it out for two years.
For those two years, they were claiming depreciation on their taxes, so though they sold for about the same amount as they purchased for, there will be some gain according to the worksheet.
I've often heard a rule that if you lived in the home two out of the last five years that there is an exemption from capital gains, but I don't know if that exemption is waived when depreciation is claimed. The dollar amounts are $167,000 from the sale and the gain is about $20,000 due to depreciation claimed and small profit from the purchase price. They're in the 15% tax bracket.
Does the living two of the last five years exempt them from capital gains on that property?
