First, my disclaimer. I'm a PA resident but have not run into this before.
Second, please confirm my understanding of your facts. Does he reside (now) in PA? I assume he does, but after leaving his AL residence he rented it out while living in PA. Is that close? And where if at all does the AL tax on the sale come into play?
But I'm avoiding your question. Not sure what you have read, but both the leaflet they publish on the topic
https://www.revenue.pa.gov/FormsandPubl ... ev-625.pdf and the relevant regulation
https://casetext.com/regulation/pennsyl ... f-property are unfavorable. Same for PA Schedule 19,
https://www.revenue.pa.gov/FormsandPubl ... /pa-19.pdfHere's the reg. part that seems to apply.
(B) If a residence includes business or rental premises, only that portion of gain on the disposition of the property allocable to the portion used as a residence is subject to the exclusion. Examples include a sole proprietor's residence above the sole proprietor's store, an office in home and a duplex where one unit is rented.
61 Pa. Code ยง 103.13
There's a modicum of ambiguity. In your facts, the residence doesn't just "include" rental premises, it
is the rental premises. And the examples they use lend themselves to allocation. Yours does not, other than allocation based on relative holding periods, which does not appear to be allowed.
However, right after the above excerpted language is this:
(ix) Depreciable property. If, at any time during the taxpayer's holding period, any portion of the principal residence sold was ever subject to the allowance for depreciation, only that part of gain on the disposition of the principal residence that is allocable to the portion of the principal residence which has never been subject to the allowance is subject to the exclusion.
. Well, your facts are that the whole property was (for a while) subject to depreciation EXCEPT, importantly, the land. I think that's a genuine loophole, i.e., it's unintended. So I'd have no problem excluding the portion of the gain allocable to the land. I don't know for sure, but I don't think this has veer been the subject of a case or orhet interpretation. Determining that allocation might be tough, but ...
Short of that, I think PA would argue the entire gain is taxed. They'd say it lost its identity as a residence when it got rented out.