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Publication 17

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.

Example 1.(p111)

On May 28, 2005, Amy, who is unmarried for all years in this example, bought a house. She moved in on that date and lived in it until May 31, 2007, when she moved out of the house and put it up for rent. The house was rented from June 1, 2007, to March 31, 2009. Amy claimed depreciation deductions in 2007 through 2009 totaling $10,000. Amy moved back into the house on April 1, 2009, and lived there until she sold it on January 29, 2011, for a gain of $200,000. During the 5-year period ending on the date of the sale (January 31, 2006–January 29, 2011), Amy owned and lived in the house for more than 2 years as shown in the following table.
Five Year
Used as
Used as
1/31/06 –
16 months   
6/1/07 –
  22 months
4/1/09 –
22 months  
 38 months22 months
During the period Amy owned the house (2032 days), her period of nonqualified use was 90 days. Because the gain attributable to periods of nonqualified use is $8,415, Amy can exclude $181,585 of her gain.

Example 2.(p112)

William owned and used a house as his main home from 2005 through 2008. On January 1, 2009, he moved to another state. He rented his house from that date until April 30, 2011, when he sold it. During the 5-year period ending on the date of sale (May 1, 2006–April 30, 2011), William owned and lived in the house for more than 2 years. He must report the sale on Form 4797 because it was rental property at the time of sale. Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. 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.

Depreciation after May 6, 1997.(p112)

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.

Property used partly for business or rental.(p112)

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