J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

29.7 Personal and Business Use of a Home

If in 2012 you sold a home that was used for business or rental as well as residential purposes, you may be able to exclude part or all of any gain realized on the sale. The excludable amount depends on whether the non-residential and residential areas were part of the same dwelling unit, whether the ownership and use tests (29.2) were met, whether depreciation was allowable after May 6, 1997, and whether the non-residential use was before 2009 or after 2008.

Nonqualified use after 2008.

Gain allocable to periods of “nonqualified” use (not used as principal residence) after 2008 is not excludable from income (29.2), but certain nonresidential periods are excluded from the definition of nonqualified use. For example, renting your home after you (and your spouse) move out is not nonqualified use if the rental occurs within the five-year period ending on the date of sale (see Example 2 in 29.2).

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Law Alert

Nonqualified Use After 2008 May Limit Exclusion

Unless an exception applies (29.7), any period after 2008 that a home is not used as your principal residence is considered a period of “nonqualified use,” and gain allocable to the nonqualified use is taxable, even if the two-year residential use test for an exclusion is otherwise met (29.2).

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As discussed below, the IRS has indicated in Publication ...