“However, what if I am in a loss position? Let’s estimate that I sell the house for $100,000 and show a loss of $9,900. I know you can’t deduct a loss on home for your primary residence.”--->Correct; you cannot deduct a loss from the sale of your main home. It is still a personal loss because the property is not a rental any more. However, as you can see, the depreciation deduction, $30,000, might be large enough, I guess, to exceed the property's rental income, and you could use it to offset your rental income and therein reduce your tax liabilities as well. Also, the property is not even subject to deprecation recapture rule since it is sold in loss( as the adjusted basis for the property is lower than it s FMV). If you sell the property converted from a rental into your personal residence in gain, then the amount of depreciation, $30,000, you deducted after May 1997 will be taxed at the special 25 percent federal depreciation recapture tax rate UNDER the SEC 1250 depreciation recapture rule.
“However, what if I sell the home prior to the 2 years that would make it my primary residence for tax purposes (exclude gain)? Can I deduct the $9,900 if I sell the home in 2011 or would I have had to sell the home in 2010 to be able to write off the loss?”---->As said above, when selling a rental house at a loss, the loss may actually turn out to be smaller than you’d expect; while you were renting it out, you were most likely depreciating the cost of the house,$30,000, on Schedule E. When you sell the house, your cost basis in the house is reduced by the amount of depreciation you’ve taken, which makes for a smaller loss. Your loss from the sale of a rental property is tax deductible as an ordinary loss. Ordinary losses are deductible in full against your ordinary income (like your wages and interest you earn).
“ Or should I have not moved into the home at all in 2010 in order to write off the loss?”---->I guess once you move into your home, then it becomes your regular primary home, NOT rental property any longer and the rule, aas said above, applies to your property as your primary home.