Article Highlights:Sale of a Rental Property Converted to a Personal ResidenceExclusion of Gain on Sale of Personal Residence – The Ownership and Use TestsPartial Exclusion of GainThe Impact of a Rental Period After 2008Depreciation RecaptureReporting the SaleDeductions When a Rental Property Is Converted to a Personal ResidenceConverting a rental property to a personal residence raises unique tax implications. If you own a home that you currently rent out and are thinking of converting the property to use as your personal residence, here are issues you should be considering.On conversion, you can no longer deduct the same expenses – such as costs of utilities, home insurance and repairs – that were deductible when the property was a rental. However, the deductions for mortgage interest expense and property taxes will be available and can be useful if your itemized deductions exceed the standard deduction. Even so, these home-related deductions may be limited, depending on the mortgage (loan) amount (for the interest deduction) and whether the overall state and local taxes you paid during the year exceeded $10,000 (for the property tax deduction). Some credits may also be available, such as those for installing a solar system or making energy-efficient home improvements.The more complex impact of the conversion occurs when the property is sold. As a personal residence, some or all of the gain on the sale of the property, if any, can qualify for exclusion from income under certain conditions.Loss on Sale of a Personal ResidenceYou cannot deduct a loss incurred on the sale of your personal residence as nonbusiness losses are not deductible.Exclusion of Gain on Sale of Personal Residence – The Ownership and Use TestsWhen certain conditions are met, a single taxpayer may be able to exclude from income up to $250,000 of the gain on the sale of a personal residence, while up to $500,000 of gain can be excluded on a joint return. The exclusion is allowed each time a taxpayer meets the eligibility requirements, but generally no more frequently than once every two years.The general qualification for exclusion of gain on the sale of a personal residence is subject to two tests: the ownership and use tests.The ownership test requires that you have owned the home for at least two of the five years leading up to the home’s sale date.The use test requires that you must have lived in the home as your main residence for at least two years during the 5-year period ending on the date of the sale. This period does not have to coincide with the two-year period that meets the ownership test. For example, you may have rented and lived in the property for two years then bought the property from the landlord. Then you may have rented the property out for the next two years before selling it. You would have satisfied the use test in the two years while renting the property from the previous owner. And you would have satisfied the ownership test in the two years before the sale while the property was rented out. Thus, the sale qualifies under the ownership and use tests.If you are married, to be eligible for the $500,000 exclusion, either you or your spouse may have been the owner during the testing period, but both of you must meet the use test.If you originally acquired the home via a tax-deferred exchange, then you (or your spouse, if married) must own the home for a minimum of five years before the home sale exclusion can be used, provided you (and your spouse, if married) also meet the 2-year use test.Partial Exclusion of GainIf the ownership and use tests are not met, the sale of a personal residence may still qualify for a partial exclusion of gain if the reason for the sale was work-related, health-related, or triggered by an unforeseen event. IRS Publication 523 provides details as to how each of these situations is determined.A work-related move involves:A new job location that is at least 50 miles further from your home than your previous job location; orIf no previous job location, a new job that is at least 50 miles from your home; orEither of the above is true for your spouse, a co-owner of the home, or anyone else for whom the home was a residence.A health-related move involves:A move “to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.”A move “to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury. A family member includes your:a) Parent, grandparent, stepmother, stepfather;b) Child (including adopted child, eligible foster child, and stepchild) or grandchild;c) Brother, sister, stepbrother, stepsister, half-brother, half-sister;d) Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law; ore) Uncle, aunt, nephew, or niece.”You moved pursuant to a doctor’s recommendation because you were experiencing a health problem.“The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.”