How do I report the sale of a rental property that qualifies for the main home exclusion?

To qualify for the main home exclusion, the IRS states, “If you used and owned the property as your principal residence for at least 2 years out of the 5-year period ending on the date of sale, you have met the ownership and use tests for the exclusion.”

You may read more about qualifications for the Maximum/Partial Exclusion here.

When reporting a property that has been used as both a rental and a primary residence, you may need to include both a Form 4797 and a Sale of Main Home Worksheet on your tax return if part of the property is treated as a separate rental or business portion.

How do I report this within the program?

To report the sale of the Rental portion of your property, please follow this path:

  • Federal 
  • Income (Select my forms)
  • Less Common Income
  • Form 4797
You may need to make two separate entries depending on how the property was set up: One for the land that cannot be depreciated (Part I - Property held more than 1 year) and one for the dwelling that was depreciated (Part III - Section 1250). 

To report the sale of the Primary Residence portion of your property

  • Federal 
  • Income (Select my forms)
  • Investments
  • Sale of Main Home worksheet

Note: If part of the property was used as a separate rental or business unit, you must allocate the sales price, cost/basis, and depreciation between the personal and rental portions using a reasonable method (such as square footage or usage percentage). The personal portion is reported on the Sale of Main Home Worksheet, while the rental portion is reported on Form 4797.

What about Depreciation Recapture?

If over the life of your residential rental property, you claimed depreciation, you will need to recapture that deduction. Even if you did not take the depreciation deduction, the IRS still requires you to report the amount that could have been taken. Depreciation cannot be excluded under the home sale exclusion and is taxed as unrecaptured Section 1250 gain (up to 25%).

To report this within the program, please follow this path:

  • Federal 
  • Income (Select my forms)
  • Less Common Income
  • Form 4797
  • Allowable Depreciation

Note: If the property was held for longer than a year, the property type will be indicated as “Part III – Section 1250”. 

Military and certain government employees may qualify to suspend the 5-year ownership and use test for up to 10 years while on extended duty; however, this rule only affects eligibility for the home sale exclusion and does not impact Form 4797 reporting or depreciation recapture.

You may read more about Depreciation Recapture here.

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