Rental house that was a previous primary residence that we now want to sell.

[Clinton Springer]

Trying to determine if anyone has had this experience and how to determine the tax implications of our situation.

We had lived in our house from March 2017 to March 2023 when we turned it into a long term rental.

We are coming up to March, 2026 which will be 3 full years of it being a rental.

We are now looking to sell the property to potentially pay down the loan on our current primary residence.

What is the penalty in Oregon for having a rental home hit 3 years of being a rental and no longer a primary residence?

Thank you

 

[Matthew Hamilton]

There isn’t really a “penalty” for having the property as a rental for three years, but you may lose eligibility for the federal capital gain exclusion if you hold it too long.

Here’s how it works:

The IRS allows you to exclude up to $250,000 of gain if single or $500,000 if married filing jointly when selling your primary residence, as long as you’ve owned and lived in it for at least two of the five years leading up to the sale.

Since you moved out in March 2023, you’d still meet that “2 out of 5 years” rule if you sell by March 2026. That’s your cutoff date. Once you pass that point, it’ll have been more than three years since you lived there, and you’ll no longer qualify for the exclusion.

If you sell before March 2026, you can likely exclude up to $250k/$500k of gain from federal taxes. You’ll still need to pay tax on depreciation recapture from the period it was rented.

If you sell after March 2026, you’d lose the exclusion and the entire gain would generally be taxable.

Oregon doesn’t impose an extra “penalty,” but it does follow federal rules pretty closely—so you’d owe state income tax on any taxable gain that isn’t excluded federally.

In short: sell before March 2026 to qualify for the exclusion, and plan for some tax on the depreciation you took while it was a rental.