Capital gains on sale of home question

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but is the exemption dependent on if you reinvest your gains into your next home?

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This leads me to a question, if i have a house i paid 350k for and its paid off and sell it for 650k, do i have to pay anything when i sell?

It is 500k over the purchase price correct?

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Could I avoid capital gains taxes on a rental property if I quit renting it and call it my residence for a while and then sell it later?

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Qualified Versus Non-Qualified Use

You might not be allowed to claim all your primary residence capital gains exemption, even after accounting for depreciation recapture. This gets tricky since we have to dig into recent changes with the tax code. Since 2009, the IRS has required your ownership period to be categorized between qualifying and non-qualifying use. Qualifying use is when the home serves as your primary residence and is eligible for the IRC Section 121 gain exclusion for the sale of principal residence. Non-qualifying use is the period where the property is rented out or serves as a secondary home to you, such as a vacation property.

This test applies to ownership periods starting in 2009, and it determines how much of your gain is eligible for the tax-free exclusion and how much is subject to capital gains taxes. Ownership periods prior to 2009 are always considered qualifying use for the purposes of this test.

You may have to prorate your capital gains exclusion based on your number of years of qualifying use of the property. That means if you move back in for two years after renting for seven years, your prorated exclusion limit will equal 2/9 of the gains. If 2/9 is less than the full $500k exemption ($250k for single filers), then you are limited to excluding the lower amount.

Prorating the exclusion only applies where the taxpayer used the residence for nonqualified purposes and then converts the property to a principal residence. The opposite is not true. If the residence was used as a principal residence first and then converted to nonqualified use, the taxpayer may potentially qualify for a full exclusion. The IRS doesn’t want people abusing the five-year rule with rentals that they move back into just before the sale. This creates two examples to consider.

If you live in your home for two years and then rent it out for two years before selling it, you qualify for the full exclusion amount due to meeting the use test by having lived in the home for two out of the last five years before the sale and meeting the ownership test.

If you rent out your property for two years and then move back in for two years before selling it, you must prorate your exclusion because the exception to periods of non-qualifying use only applies to portions of the five-year use test period that occur after the last date that the property is used as a principal residence [26 U.S.C. § 121(b)(5)(C)(ii)(I" target="_blank" rel="nofollow noreferrer">.

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Food for thought

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