Any Benefit to Selling Before 2 of 5 Year Occupancy Expires - If No Gain Other Than From Depreciation Taken?

[Burt L.]

I am working with a seller who paid 240K and will sell for 240K and moved out and started renting the property in December 2010. So the 2 of 5 year owner occupancy benefit under Section 121 will expire in December of this year. He just signed a two year lease with a tenant.

If he sells to me now, he will have 2.5 years of the costly Section 1250 depreciation recapture (25% fed and 4.6% state) which he deducted while in a 15% bracket. Thus he will sell at no gain, and have a tax bill nonetheless.

Is there any other benefit to his selling before the 2 of 5 year exclusion expires? He really doesn't want another two years of deprecation, but couldn't sell FSBO and locked himself into this lease I would potentially take over. There is equity in the deal.

I once took a large Section 1250 depreciation recapture hit - I barely felt the benefit of the depreciation, but sure felt the effect of the depreciation recapture. A 1031 exchange is not an option for him now.