Can you still exclude the gain on the sale of your home for federal income tax purposes when you have used your home partly for business or rent? The answer is generally yes, provided you have owned and lived in your home for at least two out of the last five years. But you may have to include any depreciation you claimed for the business or rental use of your home in your taxable income when you sell the home at a gain.
When You Rent Out Your Home
When you have rented out your main home for a period of time and you subsequently sell it, you can still exclude all or part of the gain provided you meet the ownership and use tests. In order to meet these tests you must have owned the home for at least two years and lived in the home as your main home for at least two years of the last five years. You could normally exclude the gain up to $250,000, or up to $500,000 if you are married filing jointly. But the depreciation you claimed or could have claimed for the period you rented out your home has to be included in your taxable income and cannot be excluded. In general, if you used your home partly for business or as rental property, the depreciation that was allowed or allowable for the period after May 6, 1997 cannot be excluded.
Home Used Partly for Business or Rental
When you have a property that you use partly as your home and partly for business or rental purposes and you sell the property, the treatment of the gain on the sale will depend partly on whether the business or rental portion of the property was part of your home or separate from your home. For example, you may have a room in your home that you use as an office or workshop, or you may rent out a room in your house. This would be considered a business or rental use within your home. On the other hand, you may have a separate structure on your property that you use for business, such as a garage or barn.
Allocation of Basis and Amount Realized
In some cases it may be necessary to allocate the basis of the property and the amount realized on the sale between the part you use as your home and the part used for business or rental purposes. You will then be able to determine the amount of gain on each part. Provided you meet the ownership and use tests, you can exclude the portion of the gain that corresponds to your home, and you would report the portion of the gain that corresponds to the business or rental part on Form 4797, Sales of Business Property.