Publication 523 (2004), Selling Your Home

Business Use or Rental of Home
You may be able to exclude your gain from the sale of a home that you have used for business or to produce rental income. But you must meet the ownership and use tests.

Example 1.

On May 29, 1998, Amy bought a house. She moved in on that date and lived in it until May 31, 2000, when she moved out of the house and put it up for rent. The house was rented from June 1, 2000, to March 31, 2002. Amy moved back into the house on April 1, 2002, and lived there until she sold it on January 30, 2004. During the 5-year period ending on the date of the sale (January 31, 1999 – January 30, 2004), Amy owned and lived in the house for more than 2 years as shown in the following table.

Five-Year Period Used as Home Used as Rental
1/31/99– 5/31/00 16 months
6/1/00 – 3/31/02 22 months
4/1/02 – 1/30/04 22 months
38 months 22 months


Amy can exclude gain up to $250,000. However, she cannot exclude the part of the gain equal to the depreciation she claimed for renting the house, as explained after Example 2.

Example 2.

William owned and used a house as his main home from 1998 through 2001. On January 1, 2002, he moved to another state. He rented his house from that date until April 30, 2004, when he sold it. During the 5-year period ending on the date of sale (May 1, 1999 – April 30, 2004), William owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797. He can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed for renting the house, as explained next.

Depreciation after May 6, 1997. If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed.

Example. Dan sold his main home in 2004 at a $10,000 gain. He meets the ownership and use tests to exclude the gain from his income. However, he used one room of the home for business in 2003 and claimed $1,000 depreciation. He can exclude $9,000 ($10,000 – $1,000) of his gain. He has a taxable gain of $1,000.