2 out of 5 years rule for selling a house

[Will610]

< Situation >
A couple purchased a house in 2007 at 1 million dollars
Lived in the house for 10 years until 2017 as their primary resident.
Rented out the house for 2 years before selling the house at 2019 at 1.7million dollars

<Question>
To make the question simple, presume the gain is $700K without considering all the cost.

Can I deduct $500k out of the capital gain ?
Or can I deduct only 420K ( $700K x 0.6 , 60% living in the last 5 years ) ?

I have a mixed opinion on this so need your feedback.

Thank you !
Will610

[Dude]

$500k but you have to recapture the depreciation they took while renting it out.

[Lion]

Correct. They had to live there and own it only two out of the last five years prior to the sale date. They owned it the whole time and lived there in 2015 and 2016 (adjust for sale date during 2019, but for your scenario those are the years).

[ATSMAN]

Use the worksheet in TTB when recapture of depreciation is involved. Your tax prep software may have a worksheet or calculation to accomplish the same.

[Will610]

thank you ATSMAN, Lion & Dude ! I am confident now : )