What If the Rental Space Was No Longer Being Rented When I Sold the Home?
- You were not using the space for rental or business purposes when the property was sold.
- You did not receive any rental or business income from that space during the year of sale.
- You used the space as part of your residence for at least 2 years during the 5-year period ending on the sale date.
Important: Depreciation Recapture Still Applies
Even if you qualify for the home sale exclusion, you must still recapture any depreciation that was allowed or allowable while the property was used as rental or business property.
Depreciation recapture is generally taxed as ordinary income and cannot be excluded under the home sale exclusion rules.
How Do I Report the Sale as My Main Home?
Complete the Sale of Main Home Worksheet and enter all required information, including any depreciation claimed during prior years.
It's helpful to have copies of prior-year tax returns and depreciation schedules available before completing the worksheet.
To access the worksheet:
- Federal
- Income (Select My Forms)
- Investments
- Sale of Main Home Worksheet
What If I Don't Qualify to Treat the Rental Portion as Part of My Residence?
If part of the property remained dedicated to rental or business use and does not meet the requirements above, you generally must treat the residence and rental portions as separate properties for tax purposes.
This often applies when a portion of the property:
- Was used exclusively for rental or business purposes,
- Was physically separate from the living area, and
- Continued to be used as rental or business property leading up to the sale.
Residential Portion
- $250,000 of gain if filing individually
- $500,000 of gain for many married couples filing jointly
You must allocate a portion of the sales price and cost basis to the residential portion based on a reasonable method, such as square footage.
Report this portion using the Sale of Main Home Worksheet.
Rental Portion
The rental or business-use portion is reported separately as the sale of business property on Form 4797.
For this portion:
- Any depreciation claimed must be recaptured.
- The adjusted basis used for depreciation becomes the basis for the business sale calculation.
- A portion of the sales proceeds must be allocated to the rental area using the same allocation method used for basis.
The gain attributable to the rental portion generally does not qualify for the home sale exclusion.
For detailed allocation methods and examples, refer to IRS Publication 523, Selling Your Home.
How Do I Report the Rental Portion on Form 4797?
- Federal
- Income (Select My Forms)
- Less Common Income
- Sale of Business Property (Form 4797)