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Author: ethan2007 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Check it out...ref: unique post Date: 4/18/2007 10:33 PM
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I provided a new post to get folks attention...sneaky I know...;!) I wanted to share though!

http://www.irs.gov/faqs/faq10.html

Per the IRS's own FAQs you guys are right. You have to scroll down a long way to see text on the page. I've pasted what I found below, which is exactly our situation! It is the sixth question on the FAQ page.

Example given:
I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?

If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to the maximum dollar limit. However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797 (PDF),Sale of Business Property. Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on calculating and reporting the amount of gain.


References:

Publication 523, Selling Your Home
Publication 527, Residential Rental Property
Form 4797 (PDF), Sale of Business Property

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