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Hello All!

I had posted my question on another board earlier and the folks over there suggested I post it here. So here goes.

My wife and I recently sold a property that she owned and lived in prior to us getting married and selling the property. She bought the house in 2000 and lived there until 2003 (more than two years). She then rented the property from 2003 until she sold the home in 2006. All the while we thought we would be excluded from paying capital gains.

Apparently, since she had filed schedule E and claimed income and expenses during the years she rented the home then qualified as a rental property per the IRS code. Of course, I haven't been able to find this code and this is based on three CPAs who all have at least 20 years experience, yet none were willing to dig up the code without a fee). All three CPAs advised that since it was turned into a rental property and she never re-established residency before selling the property we owed the capital gains tax.

So, she lived in it for two years out of five and she did not make more than 250k. Does she owe the tax or is she excluded?

Note, we've already sent in our taxes and paid the tax man, but if I find out that we should not have paid the taxes then I will file an amended return.

All responses will be greatly appreciated!


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