Sale of Rental Prop after use as Pers Residence

[Dale Watkins]

MH bought prop in 2001 for 395K and sold it in 2013 for 575K. She occupied prop for 10 yrs until 2011
and rented it for the 2 yrs until sale last yr. Based on home sale worksheet, using the # of days, the rental
prop is approx 16.5% (2 yrs/12 yrs)=non qualified use (gain from this portion may not be excluded from
gross income).

There is an exception to this:
The Master Tax Guide says "any portion of the 5 yr period ending on the date of sale date that is after the
last date that the property is used as a personal residence.
In the example, TP owned property from 2013 to 2015 as rental prop and as residence from 2015 to 2017.
1 yr passed and in 2018 the prop was sold. Purchase price of 400K and selling price of 700K=300K gain.
40% (2 yrs/5 yrs) is allocated to non qualified use and not eligble for exclusion=120K. The gain of 180K
is excluded from gross income. The 1 yr period of 2017 to 2018 is after she last used it as her primary
residence so it is not a period of nonqualified use.

My question
Can MH use this exception to exclude the gain allocable to non qualified use from her gross income? The non
qualified use period (2011-2013) occurred after a period of personal use (2001-2011). MH's situation is very
similar to the example.

[mastertaxguy]

Sec 121 gain on personal residence exclusion

1. Your CCH Master Tax Guide (r) references are, I believe, to paragraphs 1705-1709. You quote an example, I believe "Eleanor," from the bottom of page 607 of the MTG 2014 edition. That example does not appear to match your scenario.
2. TTB Pp. 6-18 to 6-22 covers these issues.
3. You may be getting confused between two issues?
4. As I read your scenario, here your TP satisfies the ownership and use test (and you didn't mention if the TP had a simliar exclusion within the preceeding 2 years from date of sale so this aspect appears not to be a factor). So any gain up to the limit for TP's finiling status is excluded from income (code Section 121 exclusion).
5. However, the depreciation claimed or allowable for post May 6, 1997 depreciation (it appears about 2 years worth) must be recovered, and of course, that depreiation was based on the lower of the FMV or basis at time of conversion to rental (form 4797). (TTB p. 6-22 top left column).
5. Your scenario does not suggest this was a situation where the owner/TP occupied the premises and rented out a portion which would, as we know, not reuqire a recapture of depreciation.
6. This is not a scenario, as you present, where the taxpayer does NOT qualify for the maximum exclusion due to lack of 2 year ownership and use test or prior exclusion within 2 years of sale of the current residence (TTB 6-20, lower right column).