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We have a co-op which was our primary residence from March '02 to September '03. It is now being rented at a low rate, not for profit.

So, we will report the rental income, and deduct the rental expenses up to the amount of the income. And I understand we have to depreciate it over 27.5 years. So in 27.5 years, will the cost basis be zero? And thus the capital gains are quite large?

Here are the more important questions - if we return to it as a primary home for six months before March '07, and then sell, is the profit up to 500K (MFJ)tax free? In other words, is it all right that the 2 out of 5 years are not consecutive? Do 24 out of 60 months qualify, or 104 out of 260 weeks?? Further, what is the adjustment to the cost basis, if it has been depreciated over 3 years as a rental property?

Or if we turn it into a second or vacation home, with no rental income, what are the tax consequences then?

Thank you,
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If it is a rental not for profit, you don't report it on Schedule E and you don't take depreciation. You report your income on line 21 and your expenses on Schedule A. Obviously some of your expenses, such as insurance, won't be deductible.

The 2 years during the last 5 preceeding the date of sale need not be consecutive.

There are no tax consequences of converting it to a second or vacation home.
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