Taxpayer bought primary residence in 1998. Lived there until July 2007, purchased and moved to new primary residence, and listed home #1 for sale. No reasonable offers, so taxpayer began renting home #1 March 2008. Home #1 rented until August 2010, but house was actively for sale throughout this time. Home #1 vacant from Aug 2010 through sale in April 2011.
In five-year lookback period, the home was owned by taxpayer the entire time, but: lived in as primary residence for 16 months; rented for 29 months; vacant for 15 months.
Home #1 sold at a gain, plus depreciation recapture from period of rental.
Taxable sale of real estate because taxpayer does not meet 2 year out of 5 year rule? Reportable on Form 4797 with depreciation recapture? Subject to state tax as well?
Can unforeseen circumstances be used for reduced exclusion? Can a recession/real estate crash be deemed an acceptable unforseen circumstance? Taxpayer intent was to sell home #1 in July 2007. How could they have known it would take almost 4 years for it to finally sell?
Thanks in advance.