Short answer: It depends on three things: whether the house cash-flows after every landlord cost, whether your equity would do more for you elsewhere, and the tax clock. A low existing rate is the big reason keeping can win. In FirstDoor's $300,000 example, keeping a 3.00% loan leaves about $388/mo of cash flow (DSCR 1.39), while buying the same house today with 20% down at 7.40% loses about $287/mo. If you lived there 2 of the last 5 years, selling within about 3 years of moving out can keep up to $250,000 of gain ($500,000 married filing jointly) tax-free under IRS Pub 523, except the depreciation taken while it was a rental.
Definition
The home sale exclusion (Section 121) lets you exclude up to $250,000 of gain ($500,000 married filing jointly) when you sell a home you owned and lived in as your main home for at least 2 of the 5 years before the sale. If you lived there at least 2 years before moving out, that leaves roughly 3 years to sell and keep it.
By the numbers: IRS Pub 523: gain equal to depreciation allowed or allowable after May 6, 1997 can't be excluded, even inside the window. FHFA National Mortgage Database: 49.1% of outstanding US mortgages had a rate under 4% in Q2 2026, vs a 7.40% Freddie Mac 30-year average on October 15, 2026.
The three questions that decide it
Lots of first-time landlords never planned to be one. They got a new job, needed more space or moved in with a partner, and the old house was suddenly a choice: sell it, or rent it out. Three questions decide most of it:
1. Does it cash-flow? Rent minus every landlord cost (vacancy, repairs, management, tax, insurance) minus your mortgage payment.
2. Is your equity working? The cash you would get from selling could go somewhere else, like your next down payment. Compare the cash flow with that equity.
3. When does the tax clock run out? Gain on a home you lived in can be tax-free, but only if you sell within a window after you move out.
The reason so many people keep the old house is the mortgage rate. In FHFA's National Mortgage Database for Q2 2026, 49.1% of outstanding US mortgages had a rate under 4% (19.2% under 3%), and only 22.5% were at 6% or more. A new 30-year loan averaged 7.40% in Freddie Mac's survey on October 15, 2026. Freddie Mac's weekly average has only been below 3% in 2020 and 2021, so a loan from those years can be hard to replace, and the difference is real money every month.
Good to know: This guide is educational, not tax or legal advice. The tax rules below are from IRS Publications 523 and 527 for 2025 returns. Check your dates and numbers with a CPA before you list or lease.
Your low rate vs buying the same house today
The fairest test is to compare keeping the house with buying it again as a rental at today's rate. Same $300,000 house, same $2,100/mo rent, same costs (5% vacancy, 5% maintenance, 8% management, $2,671/yr tax, $1,500/yr insurance). The only difference is the loan:
| Scenario (example inputs) | P&I / mo | Cash flow / mo | Cash-on-cash | DSCR |
|---|---|---|---|---|
| Keep it: 3.00% loan, 25 yrs left | $987 | $388 | 5.1% | 1.39 |
| Buy it today: 20% down at 7.40% | $1,662 | −$287 | −5.0% | 0.83 |
The existing 3.00% loan costs $675/mo less than a new one, which turns a deal that loses $287 a month into one that makes $388. A new buyer would need a rate of about 5.58%, or rent of about $2,450/mo, just to break even with 20% down.
But look at the cash-on-cash column. For the keep scenario it is measured on your equity (about $92,000): the cash you leave in the house by not selling. A 5.1% cash return on that money is positive but modest. If you need that equity for your next home's down payment, keeping the house may not be an option.
Tip: Run your own numbers: in the rental cash-flow calculator, enter today's value as the price, your equity as the down payment percent, your current rate and the years left on your loan. Then run the buy-today version to compare.
The 3-year tax clock (the home sale exclusion)
When you sell a home you lived in, IRS Publication 523 lets you exclude up to $250,000 of gain from income, or $500,000 for a married couple filing jointly. To get the full exclusion you generally must pass these tests:
Ownership: you owned the home for at least 24 months (2 years) in the 5 years leading up to the sale (the closing date).
Residence: you lived in it as your main home for at least 24 months (730 days) in those 5 years. The months don't have to be in a row.
Look-back: you didn't exclude gain on another home sold in the 2 years before this sale.
Here is why that matters to a new landlord: the 5-year window keeps moving forward. If you lived in the house for at least 2 years right up until you moved out, you keep passing the residence test for roughly 3 years after you move out. After that, fewer than 2 of the last 5 years were spent living there.
| Last day living there (example) | Close the sale by |
|---|---|
| Jan 31, 2026 | about Jan 31, 2029 |
| June 30, 2026 | about June 30, 2029 |
| Dec 31, 2026 | about Dec 31, 2029 |
Renting the house during that window doesn't shrink the exclusion. Pub 523 counts most time after 2008 when a home isn't your main home as "nonqualified use," which can make part of the gain taxable. But it makes an exception for any part of the 5-year period after the last date you lived there. That is different from renting a house out first and moving in later, which Pub 523 does treat as nonqualified use.
Red flag: Cutting it close. The test is counted to the closing date, not the day you sign a contract, and deals slip. Count the days with your own move-out date, aim to close a few weeks early, and ask a CPA if you were ever away from home or are married and only one of you lived there.
Good to know: If you sell after the window, you generally lose the full exclusion. Pub 523 has a partial exclusion for some sales that happen because of a work-related move, health reasons or other unforeseeable events. Whether one fits your situation is a question for a CPA.
Depreciation starts the day it becomes a rental
Once the house is rented or ready to rent, it is a rental property under IRS Publication 527. Rent is income, and the usual landlord expenses (mortgage interest, property tax, insurance, repairs, management) are reported on Schedule E. You also start depreciating the building: straight line over 27.5 years, starting in the month you convert it.
For a former home, the starting point is special. Pub 527 says the basis for depreciation is the lesser of the property's fair market value or your adjusted basis on the date you change it to rental use. Only the building counts, not the land.
Depreciation basis = lesser of (value at conversion, adjusted basis) − landExample inputs: you bought in 2021 for $260,000 and it is worth $300,000 when you move out. The lower number is your $260,000 basis. If the land is 20% (check your tax assessment), the building basis is $208,000, which is about $7,564 of depreciation per full year.
Red flag: Skipping depreciation because you plan to sell soon. Pub 523 says you can't exclude gain equal to depreciation "allowed or allowable" after May 6, 1997, so it reduces your basis and gets taxed at sale whether or not you claimed it. Skipping it only loses the deduction.
What happens at tax time if you sell later
Say you move out in June 2026, the house is rented from July 2026, and you close a sale for $300,000 in June 2029, inside the window. All values are example inputs, and the home's value is assumed flat to keep it simple:
| Depreciation, July 2026 to June 2029 (mid-month) | about $22,061 |
| Adjusted basis at sale ($260,000 − depreciation) | $237,939 |
| Gain before selling costs ($300,000 − adjusted basis) | $62,061 |
| Part from depreciation: can't be excluded | $22,061 |
| Rest of the gain: can be excluded (up to $250k / $500k) | $40,000 − selling costs |
The depreciation part is taxed as unrecaptured section 1250 gain at a maximum 25% federal rate (IRS Topic 409), so up to about $5,515 here. You deducted that $22,061 against rental income along the way, so this is the IRS taking back part of that benefit. The rest of the gain, minus selling costs, is tax-free if you pass the tests.
Sell after the window instead, and the whole gain is generally taxable as a capital gain. The depreciation part keeps its 25% maximum rate, and there is more of it each year you hold the house.
Good to know: Selling costs reduce the gain: Pub 523 subtracts selling expenses such as agent commissions, advertising and legal fees from the sale price. Commissions and closing costs vary and are negotiable, so plug in real quotes rather than a rule of thumb. Pub 523 Worksheets 2 and 3 walk through the full calculation.
Before you become an accidental landlord
If the numbers say keep it, do these things before the first tenant moves in:
1. Switch the insurance. A homeowners (HO-3) policy is built for a home you live in. Ask for a landlord (DP) policy. See rental property insurance cost.
2. Check the property tax bill. A homestead exemption is usually for a home you live in, so your bill can go up once it is a rental. See property taxes on a rental.
3. Read your mortgage. Many owner-occupied loans require you to move in and live there for a set time; for FHA loans, HUD's handbook says the borrower must intend to live there for at least one year. Read your loan documents and tell your lender how you'll use the house.
4. Price the rent from comps. Use real comparable rentals, then stress-test $100 to $200 lower.
5. Budget the costs you used to ignore. Use a realistic vacancy rate and a management line even if you'll manage it yourself, plus cash reserves for repairs.
6. Put your sell-by date on the calendar. Decide now, while the exclusion is still on the table, whether this is a 1-to-3-year rental or a long-term one.
Tip: Try both versions of your house in the full deal score. If it only works at 0% vacancy and 0% management, selling is probably the safer move.
Worked example
Example inputs: a $300,000 house you bought in 2021 for $260,000 with a $234,000 30-year loan at 3.00% (Freddie Mac's weekly average was under 3% for much of 2021). After 5 years of payments the balance is about $208,000, leaving about $92,000 of equity. It rents for $2,100/mo, with $2,671/yr tax (the US effective rate of 0.89%, Census ACS 2024), $1,500/yr insurance (assumed), 5% vacancy, 5% maintenance and 8% management. The comparison buys the same house today with 20% down at 7.40% (Freddie Mac average, October 15, 2026) and 3% closing costs. In the calculator link, your equity is entered as the down payment and 25 years as the term.
| Rent | $2,100 |
| Operating costs | −$726 |
| NOI per month | $1,374 |
| Your existing P&I (3.00%) | −$987 |
| New buyer's P&I (7.40%) | −$1,662 |
Frequently asked questions
Should I rent out my house or sell it?
It depends on three things: whether the house cash-flows after every landlord cost, whether your equity would do more for you elsewhere, and the tax clock. A low existing rate is the big reason keeping can win. In FirstDoor's $300,000 example, keeping a 3.00% loan leaves about $388/mo of cash flow (DSCR 1.39), while buying the same house today with 20% down at 7.40% loses about $287/mo. If you lived there 2 of the last 5 years, selling within about 3 years of moving out can keep up to $250,000 of gain ($500,000 married filing jointly) tax-free under IRS Pub 523, except the depreciation taken while it was a rental.
How long can I rent out my house and still avoid capital gains tax?
Usually about 3 years after you move out. IRS Pub 523 requires that you owned the home and lived in it as your main home for at least 24 months in the 5 years before the sale closes. If you lived there at least 2 years right up to moving out, that stays true for roughly 3 years. Renting it during that time does not count as nonqualified use, but the depreciation can't be excluded.
Do I pay tax on depreciation when I sell my former home?
Yes. Pub 523 says you can't exclude gain equal to depreciation allowed or allowable after May 6, 1997, even if the rest of the gain qualifies for the exclusion. That part is generally taxed as unrecaptured section 1250 gain at a maximum 25% federal rate (IRS Topic 409). It applies whether or not you actually claimed the depreciation.
What is the depreciation basis when I turn my home into a rental?
IRS Pub 527 says it is the lesser of the fair market value or your adjusted basis on the date you change it to rental use, and only the building counts, not the land. Residential rentals are then depreciated straight line over 27.5 years.
Why do so many people keep their old house as a rental?
Often it is the mortgage rate. FHFA's National Mortgage Database shows 49.1% of outstanding US mortgages had a rate under 4% in Q2 2026, and 19.2% were under 3%, while Freddie Mac's 30-year average was 7.40% on October 15, 2026. A low payment can make a house cash-flow as a rental even when buying the same house today would lose money.
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Sources
Educational content, not financial advice. Loan programs and requirements change; confirm with a lender.