An exclusion would not apply to rental property.
Not quite accurate. I think both of you are just not on the same page.
If one is selling rental property, and it "was" their primary residence for at least two of the last five year's they owned it, counting back from the closing date of the sale, then they qualify for the exclusion, and a partial exclusion if certain criteria is met.
So the sale of a rental property is being reported, since most likely the property was the seller's primary residence for a period of time before they converted it to a rental, and that period of time is within the last 5 years they owned it. So they qualify for the partial exclusion if the criteria are met.
