Sale of home converted to rental

[manyhappyreturns]

TP and spouse owned and lived in a house for 10 years, then converted it to a rental in January of 2015. They lived in a rental house until September 2015 at which time they bought the house they are living in. They were planning to sell the original house next year or the year after and are thinking they would still get the exclusion if they sell it within 3 years, because they would have lived in it as their main residence for 2 of the past 5 years. Because they bought another house that they are using as their primary residence, I was thinking they can't claim the exclusion, but then I got to wondering. Any input on this?

[Lion]

Owned and lived in as primary residence for two out of last five years ending on sale date. So, the date they moved out to the date they sell is the critical time. Don't wait too long to put it on the market in case it takes some time to sell. And, can't have had a different excluded sale within two years (before or after), so don't sell current residence unless it's a higher profit until at least two years later.

[Matt Sova]

Depreciation Recapture

Any depreciation allowed OR allowable is not excluded from the gain. So, if they rent it out for two years and it sells prior to three years after they gave it up as their principal residence, they can exclude the gain. Except for the depreciation taken on the house while it was a rental. The taxpayer can't say "well we just won't take depreciation on the rental". Because of allowed or allowable you will still have to pay tax on the recapture as though depreciation was taken.

[manyhappyreturns]

Thanks everybody! I'll pass on the info to the TP, and I'll make sure he doesn't wait too long. He says the gain on the house will be substantial.