Renting out your old house instead of selling it

The two-out-of-five-year rule

The home sale exclusion requires that you owned the home and used it as your main residence for at least two of the five years before the sale. The two years do not have to be continuous. Move out, and the clock keeps running: after three years as a rental, you no longer have two years of residence inside the five-year window.

Time spent renting the house after you move out generally does not shrink the exclusion, as long as you sell inside that window. Renting it before you lived there is different and can reduce the exclusion proportionally, which matters if you convert a rental into your home.

An example

You lived in a house from 2017 until you moved out in January 2025, then started renting it. If you sell by January 2028, you still have two years of residence inside the five years before the sale, so the exclusion is generally available. Sell in mid-2028 and it is generally gone, and the full gain is taxable.

What renting changes

• Depreciation. Once it is a rental you are allowed to depreciate it, and that depreciation is taxed when you sell even if the rest of the gain is excluded. See depreciation recapture.
• Your basis for depreciation is the lower of what you have in the house or its market value on the day it became a rental.
• Insurance. A homeowner policy usually does not cover a tenant-occupied house. You need a landlord policy.
• Property tax. In Texas, a homestead exemption ends when the house is no longer your main home, and you are expected to notify the appraisal district. Taxes on the rental will usually rise.
• Your mortgage. Most owner-occupied mortgages expect you to live in the home for at least a year after closing. After that, renting is generally fine, but read your loan documents.

How to decide

Run three numbers, not one:

1. What the house would earn as a rental after every cost, including management, maintenance, and a reserve for capital items.
2. What it would net if sold now, tax-free under the exclusion, and what that cash could do for you.
3. What it would net if sold after the window closes, with the gain taxed.

Many owners discover the rental's return on equity is thin because years of appreciation are sitting in the house. Others find it is a strong rental worth keeping despite the tax. The point is to choose on purpose before the three years quietly run out.

There are also strategies that combine the home sale exclusion with a 1031 exchange on a former home that became a rental. They have specific rules and are worth raising with a CPA if you are in that situation.

Where we fit

We build the keep-versus-sell comparison for your house, mark the date your exclusion window closes, and list the questions to take to your CPA. The $99 written property analysis is built for exactly this question if you would rather not book a call.

This page is general education, not legal, tax, investment, insurance, or lending advice. See our disclosures.