Primary Residence to Rental Property

If you have lived in this home as your main home and have owned it for at least two of the five years before sale, and have not converted it to a rental, you can exclude up to $250,000 of gain.

But if you convert to a rental and still meet the 2 of five rules above, you will still get an exclusion of gain, reduced because it was a rental for part of that time (rental calculation begins on 1/1/2009).

If you miss the two of five rules shown above, usually because you held it too long as a rental, there is no exclusion.

Your gain upon sale of a rental property must include the depreciation allowed or allowable, even if you never took depreciation, so it is a good idea to take depreciation.

In your example you might find a better tax solution by selling your home, avoiding all tax on gain if was your main home for the two of five rules, and using the money to buy a rental property.

What Art said. I'd only add, repair while the primary resident don't do anything for you. For primary resident, the improvements need to be tracked as they raise basis. When a rental, repairs are an expense, improvements get depreciated.

Since OP was living in the home 1/1/2009 this reduction doesn't apply as long as he doesn't move back in after interim use as a rental. See Pub 523.

Phil Marti VITA/TCE Volunteer Clarksburg, MD

Of course! Thanks for the catch.