Yes, TurboTax can handle this situation. If you have already used TurboTax for this rental property, then your prior year information will carry forward automatically for you. If not, make sure that you have the records form your prior year returns for your carry overs, including disallowed losses and accumulated depreciation.
When you do sell the property, you'll need to pay close attention to the questions on the screen. You'll be entering the sale information from the rental property section of the return because that is its current use. You'll tell TurboTax that you have sold the property. It will ask you for the date of the sale and it will ask you if the property has always been 100% business use. If your property is already in TurboTax from a prior year, this should already be filled in for you. Regardless, in this case you'll answer "no" because it wasn't always business use and then you'll fill in the date you converted it to business use.
One of the last questions in the section about the sale of the rental property will be "Was this asset included in the sale of your main home?" Answer "Yes" to this question and TurboTax will step you through the remaining questions to determine how much of the gain from your house can be excluded. It will apply the carryover information correctly and will split the information between the sale of the business asset (reported on Form 4797) and your personal residence (reported on Schedule D, with any appropriate gain exclusion).
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-- KimberW
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