Question:   A property was my principal residence for the first 2 of the 5 years ending on the date of the sale of the property. For the last 3 years before the date of the sale, I held the property as a rental property. Can I still take an exclusion, and, if so, how should I account for the depreciatiuon I took while the property was rented?

Answer:   You may be able to exclude gain from the sale of the property. If you used and owned the property as your principal residence for 2 years of the 5- year period ending on the date of sale, you have met the ownership and use tests for the exclusion, even though the property was rental property for the last 3 years before the date of the sale. To exclude gain from the sale of this property, you must not have excluded gain from the sale of another principal residence during the two-year period that ends on the date of the sale of the property. In addition, you may not exclude the part of your gain equal to any depreciation deduction allowed or allowable for periods after May 6, 1997. If you have adequate records or other evidence that the amount of the depreciation deductions claimed on your returns was less than the amount of the depreciation deductions allowable, you may limit the recognized gain attributable to depreciation to the amount of the depreciation deductions allowed.  Refer to Publication 523, Selling Your Home, and Form 4797 (PDF), Sale of Business Property, for specifics on how to calculate and report the amount of gain.