Original business property was purchased in 1989, then sold and exchanged in 2004 for a rental property via a 1031 exchange. It was used as a rental for a few years, converted to a personal residence for over 2 years, converted back to a rental and finally sold in 2010. Property qualifies (meets the use/occupancy tests) for the 500K capital gains couple exclusion (with a small reduction via the new law for unqualified use post 2008). Total gain on the property was ~150K.

I have two questions:

First, for purposes of calculating the reduction in capital gains exclusion, would I use the original purchase date (1989) for the holding period because property was acquired via 1031 exchange or the date (2004) the replacement property was acquired?

Second, for purposes of reporting the sale, IRS says to use form 4797 because property was a rental at the time of sale, but when I do this Turbotax insists on racking up a huge AMT charge on top of the recapture/excluded gain tax. I also tried reporting the sale as a primary residence used part-time for rental use (what the IRS says to do if it was a residence at time of sale) which causes TT to only charge for the post-1997 recapture & post 2008 excluded gain tax, with no additional AMT tax.

I can't believe moving back into the property for 1 day before the sale would have allowed me to avoid a huge AMT bill. Am I missing something?

Thanks!!