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We owned and lived in it since 1999, moved in May 2010 and rented it out since then. Sold August 2012.

Everything I have read so far says we can take the loss on the sale of the rental house. I have NOT yet found anything about the "lived in it for two out of the last 5 years" rule mentioned in the above quote.

The quote, which is badly worded and incomplete and should be wiped from your memory, deals with the sale of a personal residence. If you had a gain it appears you would qualify for the primary residence exclusion. See Pub 523.

A loss on the sale of a rental property is deductible. But.... Given your timeline I'm having a hard time figuring out how you have a loss for tax purposes. Your gain/loss would be the net sale price minus your depreciated basis. If the property wasn't worth what you paid for it, plus improvements, your starting point for basis and depreciation calculations is its fair market value on the date you converted it to rental.

Rule Your Retirement Home Fool
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