Part 1 Property Sales, Basis and Capital Gains question: out until December

Part 1Property Sales, Basis and Capital Gains

Gina bought a house in January 2021, rented it out until December 2022, then lived in it as her main home from January 2023 until she sold it in November 2025. Can she exclude gain under section 121?

A No; she must live in the home for all 5 years before the sale
B Yes, but gain allocated to the rental years is not excludable
C No; a home that was first a rental can never qualify
D Yes, and the whole gain is excludable up to the $250,000 limit

Show the answer and explanation

Answer: B. Yes, but gain allocated to the rental years is not excludable

Gina owned the home and used it as her main home for at least 2 of the 5 years ending on the sale date, so she qualifies for the exclusion. But under section 121(b)(5), gain allocated to periods of nonqualified use after 2008 (here the 2 rental years before she moved in, out of nearly 5 years of ownership) cannot be excluded; depreciation claimed after May 6, 1997 is also taxable. Rental use after the last period of residence would not count as nonqualified use. Source: IRC 121(a), 121(b)(5), 121(d)(6); Pub. 523 (2025), Nonqualified use. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake

Excluding all of the gain when the home was a rental before it became the main home.

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Original study material mapped to the public IRS SEE content outlines; not a real exam question.Not affiliated with or endorsed by the IRS or PSI. Verify figures and rules against current guidance before relying on them.