Business Use or  
Rental of Home(p111)

You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. But you must meet the ownership and use tests.

On May 28, 2004, Amy bought a house. She moved in on that date and lived in it until May 31, 2006, when she moved out of the house and put it up for rent. The house was rented from June 1, 2006, to March 31, 2008. Amy moved back into the house on April 1, 2008, and lived there until she sold it on January 29, 2010. During the 5-year period ending on the date of the sale (January 31, 2005–January 29, 2010), Amy owned and lived in the house for more than 2 years as shown in the following table.

Five Year  Period	Used as   Home	Used as   Rental
1/31/05 – 5/31/06	16 months
6/1/06 – 3/31/08		22 months
4/1/08 – 1/29/10	22 months
	38 months	22 months

Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed or could have claimed for renting the house, as explained later under Depreciation after May 6, 1997.

William owned and used a house as his main home from 2004 through 2007. On January 1, 2008, he moved to another state. He rented his house from that date until April 30, 2010, when he sold it. During the 5-year period ending on the date of sale (May 1, 2005–April 30, 2010), William owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797 because it was rental property at the time of sale. Because he met the ownership and use tests, he can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next.

If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. See Publication 544 for more information.

If you used property partly as a home and partly for business or to produce rental income, see Publication 523.