QUESTION: if the capital gain on a rental house (After considering depreciation basis) AND and the income from depreciation recapture is LESS than $500,000 for a married filing jointly, AND the couple lived in the rental as their primary residence the last 2 of 5 years, does the 2/5 primary residence exception result in no capital gains tax or reportable income?
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Your question is framed a bit oddly so I am not sure whether this will answer your question completely but, in short, the Section 121 (home sale) exclusion simply does not apply to depreciation deductions allowed or allowable (that figure is always unrecaptured Section 1250 gain).
For example, if the total gain on the house in your hypothetical was $400,000, you filed MFJ, and you took $50,000 in depreciation deductions, then your total taxable gain would be $50,000 (which effectively represents the total depreciation deductions allowed/allowable) while $350,000 of the gain would be excluded.
The recaptured depreciation is taxable *no* *matter* *what*. It does not get included as a part of the "2 of last 5" exclusion.
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