Tax Implications for selling 1.5 year old rental

Columbia, South Carolina
Buying & Selling Real Estate
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Tax Implications for selling 1.5 year old rental

Brent Rogers
Member since 2023 · 6 posts · 5 votes

We lived in our starter home for 19 years, then began renting it out when we moved to our current home 1.5 years ago.

If we decide to sell the rental now, will we be subject to Capital gains taxes since it is not our current primary residence?

Thanks in advance, 

Brent

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
7mo
Quote from @Brent Rogers:

Thanks y'all. I'm getting stuck on the "sale of a primary residence" part. Technically it's not a primary any longer. 

Anyone out there have experience selling a former primary (that was lived in 2 years) within the 5 year time frame?


The tax definition is primary residence is "lived in 2 of previous 5 years" meaning you might have a couple properties at a given time that qualify for this tax exemption.

Don't get hung up on the English logic of this not being your current primary because you don't live there now. These are definitions meant to describe the requirements for the tax exemption. Maybe if would sound better if they called it the "Current and recently past primary residence tax exemption", but that's too many words. They just want to convey the basic reason the exemption exists at all. 

So, the end result you should take away is that from a tax exemption perspective this is a primary residence if you lived in it 2 of the previous 5 years. 

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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    7mo

    @Brent Rogers, this is the general rule. So, as long as you sell it soon you should be ok, but the exclusion is only up to a max amount of gain/profit. So, if you were lucky and made a lot on it, you may still owe something.

    Homeowners can exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from the sale of a primary residence from federal income tax. To qualify, you must have owned and used the home as your principal residence for at least two of the five years prior to the sale.
    0Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    7mo

    I believe the rule regarding capital gains on the former primary is that you will be exempt from capital gains of $250k individiually or $500k if married so long as you lived in the house for 2 of the last 5 years as your primary residence. I could be wrong though - Im not a tax expert. Probably worth a 15 minute phone call to your tax professional to confirm this will apply to your situation.

    0Reply
  • Brent Rogers
    OP
    Member since 2023 · 6 posts · 5 votes
    7mo

    Thanks y'all. I'm getting stuck on the "sale of a primary residence" part. Technically it's not a primary any longer. 

    Anyone out there have experience selling a former primary (that was lived in 2 years) within the 5 year time frame?

    2Reply
    • Kevin Sobilo
      Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
      7mo
      Quote from @Brent Rogers:

      Thanks y'all. I'm getting stuck on the "sale of a primary residence" part. Technically it's not a primary any longer. 

      Anyone out there have experience selling a former primary (that was lived in 2 years) within the 5 year time frame?


      The tax definition is primary residence is "lived in 2 of previous 5 years" meaning you might have a couple properties at a given time that qualify for this tax exemption.

      Don't get hung up on the English logic of this not being your current primary because you don't live there now. These are definitions meant to describe the requirements for the tax exemption. Maybe if would sound better if they called it the "Current and recently past primary residence tax exemption", but that's too many words. They just want to convey the basic reason the exemption exists at all. 

      So, the end result you should take away is that from a tax exemption perspective this is a primary residence if you lived in it 2 of the previous 5 years. 

      1Reply
  • Brent Rogers
    OP
    Member since 2023 · 6 posts · 5 votes
    7mo

    Perfect. Thank you!

    1Reply
  • Jose OrtizBusiness Member
    Accountant · South Florida · Member since 2026 · 46 posts · 18 votes
    7mo

    Yes, you can be subject to capital gains tax, but based on what you shared, you may still be in a really good spot.

    Even though it’s a rental now, the IRS looks at whether you lived in the home for 2 of the last 5 years before selling. You lived there for 19 years and only moved out about 1.5 years ago, so you’re still within that window.

    If you sell before you hit roughly 3 years of renting, you should still qualify for the primary residence exclusion (up to $250k single / $500k married filing jointly). The fact that it’s not your current residence doesn’t automatically disqualify you.

    The one thing to be aware of is depreciation. Any depreciation taken while it’s been a rental can’t be excluded and will be taxed separately, usually at a higher rate. That part surprises a lot of people.

    Selling now or soon could mean little to no capital gains tax outside of depreciation, but waiting too long could change the outcome pretty dramatically. Definitely worth running the numbers before deciding.

    Hope that helps.

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  • Brent Rogers
    OP
    Member since 2023 · 6 posts · 5 votes
    7mo

    Thanks Jose!

    0Reply
  • Patricia Steiner
    Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
    7mo

    Tax. Implications. Capital Gains.

    My version of hell...

    0Reply
  • Rick Albert
    Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    7mo

    Double check with your CPA but what others are saying is generally correct. You lived in the home 2 of the last 5 years, then the first $250K if single/$500K if married is excluded.

    HOWEVER, because you have likely written off depreciation as a rental, you do have to pay that back until you do a 1031 Exchange. The dollar amount is the variable.

    I'm finishing up my 1031 Exchange House Hack which is the only reason why I know this.

    Best of luck!

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7mo

    @Brent Rogers, Yes, you can take advantage of the primary residence exclusion as long as you've lived in the property as your primary residence for at least two out of the previous five years, regardless of whether you are renting out the property or not. Having lived in it for two out of the five years prior to selling is the definition of a primary residence. You would be subject to depreciation recapture and might still have some tax after the exclusion, but you could always do a 1031 exchange, which would defer that as well as any capital gain over the $500K limit if you are married and reinvest it into another investment property.

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  • Aaron ZimmermanBusiness Member
    Accountant · Chicago, IL · Member since 2018 · 2k+ posts · 1k+ votes
    7mo

    You'll need to pay the recapture tax but capital gain would most likely be excluded up to $500k if married, $250k if single. 

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  • Brent Rogers
    OP
    Member since 2023 · 6 posts · 5 votes
    7mo

    Thanks all!

    0Reply
  • Peter Fisher
    Financial Advisor · Denver, CO · Member since 2025 · 6 posts · 0 votes
    7mo

    A lot of correct answers here. 

    In some situations, it may be possible to use the Section 121 primary residence exclusion (up to $500,000 if married) and then defer any gain above that through a 1031 exchange. 
    However, the rules are nuanced and highly dependent on your specific facts and timing.

    We strongly recommend that you consult with your tax advisor or CPA to determine what applies to your situation before taking any action. Here is an article on the topic from IPX, a Qualified Intermediary. https://www.ipx1031.com/using-multiple-tax-code-sections/.

    0Reply
  • Bo SmithPro Member
    Hinton, WV · Member since 2026 · 1k+ posts · 373 votes
    7mo

    One thing a lot of people miss - if you're gonna get hit with short-term capital gains anyway, see if you can defer some income to next year or accelerate deductions this year to offset it. Also check if any improvements you made qualify as repairs vs capital improvements for tax purposes. What's driving the decision to sell after just 18 months?

    0Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    7mo

    If you lived in a property for 19 years, moved out and turned the property into a rental, you should be able to exclude up to $250,000 or $500,000 of capital gain depending on your filing status.

    The only gain that wouldn't be eligible for exclusion is the depreciation taken on the property that it was a rental for 1.5 years.

    Best of luck!

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  • Brent Rogers
    OP
    Member since 2023 · 6 posts · 5 votes
    7mo

    Thanks Basit!

    And Bo, just fact gathering at this point.

    0Reply
  • Ariane De domenico
    Member since 2023 · 3 posts · 0 votes
    7mo

    @Bo Smith good to know! Thank you

    0Reply
  • Ariane De domenico
    Member since 2023 · 3 posts · 0 votes
    7mo

    @Bo Smith

    0Reply
  • Ariane De domenico
    Member since 2023 · 3 posts · 0 votes
    7mo

    @Peter Fisher

    Great feedback ! thank you

    0Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    6mo

    Hi Brent, Like a few people above have mentioned, since you lived in the home for 19 years and only moved out 1.5 years ago, you still likely qualify for the 2-out-of-5 year rule under Section 121. That means you can potentially exclude up to $250k (single) or $500k (married) of gain if you sell now. The only tax you’d still owe is depreciation recapture on the 1.5 years it was rented. That portion isn’t excluded.

    So yes, you can likely avoid most capital gains tax, but timing matters. Good luck, and happy to connect.

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