Could someone please help me with this tax question. I have owned a three family home and rented out two apartments which represents approximately 1,800 sq ft and I lived in
2,700 for two years. I depreciated 2/3 of the value of the building for the two preceding tax years. When I prepared my taxes I completed a form 4797 and showed the gain relating to the rental portion but I also showed a section 121 exclusion for the entire amount since I used the building as my primary residence. A friend of mine is about to sell a similar building like mine and called to ask me about the tax treatment. I did some research on-line and now I am not sure I applied the correct tax treatment. Here are my questions: Was I correct? If not, why didn't the IRS discover the error and requested that I correct the tax return? If it is an error do I still have to correct it given the fact that the return was filed three years ago. Does the statute of limitation apply, if incorrect? Thanks all.