61 Pa. Code § 103.13(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.
. 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 ...(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.
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