I have question regarding to capital gain tax to a sale of a townhouse in WA State. I just want to see if any of you can provide some advise. Thanks!

  • home purchase in 2008 for 385k and was primary residence til 2010
  • converted to rental in 2010 and still a rental today. (Worth about 680k now)

If property owner (married couple) move back to the property in June 2018 and sell the home after 2 years in June 2020. Will the property owner qualify for "Tax Free Exclusion (Capital Gain)" under section 121? If not, how can they qualify for the exclusion. Thank you!


Yes, since it was their primary residence prior to renting, they can qualify for the full exclusion if they move back in for 2 years prior to selling.

This used to be true even if you bought it as a rental and then moved in before selling, but the HOUSING AND ECONOMIC RECOVERY ACT OF 2008 amended Section 121 to disallow exclusion of gains during unqualified periods.

If it was a rental first and they moved back in, then a fractional amount of the gain would qualify for the exception, i.e. owned for 8 years, rented for 6 and lived in for 2, 25% of gain can be excluded.

When they sell, they'll still owe depreciation recapture for the period it was a rental.

Edit: I see a number of sites that claim the nonqualified use section applies if it was a rental at the onset of the 5-year look-back period, Sec 121 states:

Exceptions: The term “period of nonqualified use” does not include—

  • any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,

I believe that wording supports my answer, but tax-code is often interpreted differently.

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