Rent It Out, Then Sell: The Two-Years-in-Five Rule in Plain Words
The limit is US$250,000 for a single person and US$500,000 for a married couple filing together.
Picture a couple named Gloria and Hank, 66 and 68. They plan to move abroad in the spring. Their house has been theirs for more than thirty years. A wall calendar by the back door has the moving day circled in red.
Gloria wanted to rent the house for a while before deciding. Hank had heard that a seller needs to be living in the house to keep the tax break. "If we leave, we lose it," he said.
Gloria went looking and found the rule. In the United States, a seller who owned the home and lived in it for at least two of the five years before the sale can leave out part of the gain from tax. The limit is US$250,000 for a single person and US$500,000 for a married couple filing together. The five years are counted backward from the day of the sale.
She drew a small table for Hank. It assumes they lived in the house for many years before leaving.
| Years rented before selling | Years lived in, out of the last five | Two years met? |
|---|---|---|
| 1 | 4 | Yes |
| 2 | 3 | Yes |
| 3 | 2 | Yes |
| 4 | 1 | No |
"So three years of renting is the longest that still works," Hank said.
"For these dates," Gloria said. "We could sell at the end of year two and keep a full year to spare."
Hank liked the spare year. He wrote sell by month 24 on the calendar in pencil.
They also learned that rent counts as income, and that the rental years may change how the sale is figured. They put that question on a list for an accountant.
You could…
- Count back five years from the date you might sell, and mark the days you lived in the house.
- Ask an accountant how rental years affect the sale, and what the limit is for your filing status.
- Pick a sell-by date and write it where you can see it.
Have you rented a house for some years and then sold it? What did you learn that you wish you had known first? Share what you learned in the comments. A reader choosing between selling now and waiting a while could be helped by it.
Figures are estimates for planning, based on public data.
Sources: US Internal Revenue Service guidance on the home-sale exclusion (Topic 701 and Publication 523). Rules change and depend on your situation, so an accountant could confirm.
Tell us in the comments