My wife and I live in Baltimore. 7 years ago we bought a fixer upper, rehabbed it, then turned it into a rental in February 2018. We moved out of the house on October 31, 2017. Since then, the neighborhood has improved, and we got a buyer in 1 day when we put it on the market.

The timing of these issues is important, because our closing is October 14, 2020. I want to make sure we don't owe capital gains/taxes on our profits from the house, since we will have lived in it for just over 2 of the past 5 years if we do close on October 14, 2020 (we lived there from early 2013 until Oct 31, 2017, and have been in our new house 3 years at the end of October).

Despite receiving multiple offers and being under contract within 30 hours of it going on the market, the lender appraised it at $10k below asking. That's disappointing because we put so much time and energy into this sale and feel the house is worth it, as does our experienced agent. However, I'm worried that if we kill this deal, our next closing will fall after Oct 31, 2020, and we'll be subject to capital gains on the profits from the sale.

I mainly want to understand whether or not I'm comprehending the Primary Residency issue as it pertains to post-sale taxes. Sorry if this is unclear. If my understanding of our tax obligation is incomplete, that could effect what we do next. Thanks for any help you can be!