Should I sell or rent my house?

Written by Michael FrankeLast reviewed: November 2, 2026

Sell if you would lose the tax-free home sale exclusion by waiting or do not want to be a landlord; rent if the rent covers all your costs and you are ready to manage tenants. The deciding rule for many owners is the IRS 2-out-of-5-year test: you can exclude up to $250,000 of gain ($500,000 for a married couple filing jointly) only if you owned and lived in the home for two of the five years before the sale. Renting it for more than three years after you move out ends that.

Key facts

Exclusion: up to $250,000 of gain, or $500,000 married filing jointly (IRS Topic 701).
You must have owned and lived in the home 2 of the 5 years before the sale (26 U.S.C. 121).
Depreciation from renting cannot be excluded and is taxed at up to 25% (IRS Topic 409).

Selling in Indiana, Ohio, Wisconsin, Tennessee or Georgia? Get a written cash offer in 24 hours, no obligation.

Get my cash offer

The 2-out-of-5-year clock

The exclusion looks back five years from the sale date. If you lived in the home for at least two of those years, you qualify even if it was a rental for the rest. In practice that means a home you moved out of can be rented for up to three years and still sold under the exclusion. Wait longer and the full gain becomes taxable. Generally you also cannot have used the exclusion on another home in the two years before (IRS Publication 523).

Renting before you lived in the home is treated differently: gain tied to that "nonqualified use" after 2008 can reduce the exclusion. Publication 523 has the worksheet.

Depreciation recapture

While a home is rented, you depreciate it over 27.5 years, starting from the lower of your adjusted basis or its market value when you converted it (IRS Publication 527). When you sell, depreciation allowed after May 6, 1997 cannot be excluded even if you qualify for the exclusion (26 U.S.C. 121(d)(6)), and that portion is taxed at a maximum of 25% (IRS Topic 409).

What being a landlord involves

If you already rent the home out and want to stop, you can sell with tenants in place. See selling a rental property.

Rent is taxable income, reported each year with your expenses and depreciation.
Fair housing rules apply to who you rent to (HUD).
For homes built before 1978, landlords owe tenants the same lead paint pamphlet and warning that sellers owe buyers (EPA).
Repairs, vacancies and tenant turnover come out of your pocket, and state deposit and eviction rules apply.

Frequently asked questions

How long can I rent my house and still avoid capital gains tax?

Up to about three years after you move out, provided you lived in it for at least two of the five years before the sale. Depreciation taken while it was rented is still taxed.

Is it better to sell or rent in 2026?

It depends on your numbers. Compare the rent with your mortgage, taxes, insurance, repairs and vacancy, and weigh that against losing the tax-free exclusion if you rent too long.

Do I pay tax on depreciation if I sell a former rental?

Yes. Depreciation allowed after May 6, 1997 cannot be excluded and is taxed at up to 25%.

Sources

Checked against each source on November 2, 2026. This page is general information, not legal or tax advice.

Topic no. 701, Sale of your home (Internal Revenue Service)
26 U.S.C. 121 (exclusion of gain from sale of principal residence) (Cornell Law School LII)
Publication 523, Selling Your Home (Internal Revenue Service)
Topic no. 409, Capital gains and losses (Internal Revenue Service)
Publication 527, Residential Rental Property (Internal Revenue Service)
Fair Housing Act overview (U.S. Department of Housing and Urban Development)
Real estate disclosures about potential lead hazards (U.S. Environmental Protection Agency)