You can often still exclude the gain. If you owned the house and lived in it at least 2 of the 5 years before the sale, IRS Publication 523 generally lets you exclude gain up to the limit, except the part equal to depreciation. Texas adds one step: telling the appraisal district when your homestead exemption ends.
Picture Marcus, who lives somewhere else now and rents out the Texas house he used to call home. The rent shows up each month, the repair texts keep coming, and the lease is coming up for renewal, with a folder of old tax papers he still hasn't gone through. He is starting to wonder if it is time to sell. Selling a rental property that was your primary residence follows different tax rules than selling a house you bought as a rental, and the calendar can matter as much as the sale itself.
This guide is general information, not legal or tax advice; a CPA can apply it to your situation.
Check the 2-of-5-year test first
Say Marcus finally opens the folder. Before the tenant or a sign in the yard, the first question is whether the sale still counts as the sale of his home for federal tax purposes, because that decides how much of the gain can stay off his tax return.
IRS Publication 523 lets a seller who passes its Eligibility Test exclude up to $250,000 of gain, or $500,000 for a married couple filing jointly. The main parts of the test:
- Ownership. You owned the home for at least 24 months of the 5 years leading up to the date of sale.
- Residence. You lived in it for at least 24 months of those same 5 years. The months do not have to be in one stretch. For a married couple filing jointly, each spouse must meet this part on their own to get the full exclusion.
- Look-back. You did not take the exclusion on another home sold in the 2 years before this sale.
Converting a primary residence to a rental does not, by itself, end the exclusion. Pub 523 says gain tied to nonqualified use (time after 2008 when the house was not your main home) generally can't be excluded. But rental time inside the 5-year period that comes after the last day you lived there is not nonqualified use. In the publication's example, an owner who moves to another state, rents the house out and sells inside the window keeps the exclusion up to the limit, apart from depreciation.
The order matters. A house bought as a rental and moved into later is a different case: rental time before you live there can be nonqualified use, and Pub 523 assigns a share of the gain to it that can't be excluded. Lived there less than 24 months? A partial exclusion can still apply when the main reason for the sale is a work move, a health issue or an unforeseeable event; see how soon you can sell after buying.
How long can you rent out your old home and still qualify?
Now say Marcus counts back from the day a sale would close. This is where the window turns into a deadline, even though no letter will ever arrive to announce it.
Pub 523 measures the 5 years back from the date of sale. That is the date in box 1 of Form 1099-S if you receive one. If not, it is the date title transfers or the date the burdens and benefits of ownership shift to the buyer, whichever comes first.
The rule itself names no number of rental years, but the arithmetic does. If you lived in the house for at least 2 years right up to the day you moved out, those 24 months stay inside the 5-year window only until about 3 years after move-out (5 years minus 2). Close any later, and the oldest months of living there slide outside the window, so the residence part of the test fails. Lived there in separate stretches? Count with your actual dates, or have a CPA do it.
Members of the uniformed services or the Foreign Service, intelligence community employees and some Peace Corps personnel on qualified official extended duty can choose to suspend the 5-year period. Our guide to selling a house on PCS orders explains it. For Marcus, the standard window is the one that counts.
Account for depreciation, claimed or not
Say Marcus pages through the returns from the rental years, looking for a depreciation line. Whether he finds one or not, the depreciation still counts.
When you turn a former home into a rental, IRS Publication 527 sets the basis for depreciation at the lower of two numbers on the date of the change: the home's fair market value, or your adjusted basis (your cost, plus permanent improvements, minus casualty or theft losses you claimed and other decreases). Land is not depreciable, so only the house counts. Depreciation can begin once the house is ready and available for rent.
At sale, Pub 523 says the exclusion does not cover the part of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. So depreciation you could have taken counts the same as depreciation you did take. In the publication's example of a former home rented out before the sale, that part is unrecaptured section 1250 gain, reported on Form 4797. A CPA can tell you the rate that applies to it.
Accidental landlord: keep renting or sell?
Marcus is what people call an accidental landlord. He never planned to own a rental; the house is one because his life is somewhere else now and selling could wait. The repairs and turnovers are the same work any landlord does, but his choice comes with a clock.
That clock is the main way selling a rental property that was your primary residence differs from selling a house bought as a rental. Keep renting past the end of the window, and the full exclusion is generally out of reach. Sell inside it, and the exclusion may still cover gain up to the limit. Either way, the depreciation part is not excluded. So compare your after-tax result from selling inside the window with what the house could earn, and cost, if you hold it longer. Our holding cost calculator can tally the monthly side.
Our guide on whether to hire a property manager or sell covers the manager route and the tax rules for rentals. If a job move turned the house into a rental, see renting the house out instead of selling after a relocation.
Selling with a tenant in place or after the lease ends
Back to the renewal notice on Marcus's counter. Offering another term, letting the lease run out, or selling with the tenant still there each leads to a different closing date, and the closing date is what Pub 523 counts back from.
- Sell with the tenant in place. The Texas State Law Library says a new owner is bound by the terms of the existing lease. Our guide to how you sell a house with tenants in Texas covers the deposit, showings and notice.
- Wait for the lease to end. This can work if the end date leaves room inside the window for a sale to close. If a tenant stays past the end date, or the house takes a while to sell, the date can slip.
- Sell empty after the tenant leaves. An empty house has its own costs, so read about the risks of a rental sitting empty first.
Before you offer a renewal, set the lease end date next to the last day a closing still fits your window. If a new term would run past that day, you may be choosing between the new lease and the full exclusion.
Your Texas homestead exemption after you rent the house out
Say Marcus pulls up the property tax statement for the old house, and it still lists a homestead exemption. That is easy to miss when a mortgage escrow pays the bill, and it is the one step Texas adds to the federal checks.
A homestead is a home the owner occupies as a principal residence (Tax Code Sec. 11.13(j)). Under Sec. 11.13(l), it keeps that status through a temporary absence only if the owner does not set up a different principal residence; the homestead step in our vacant house checklist walks through the rest of that rule. For an owner like Marcus, who lives somewhere else now, that condition is the one to read closely. Two more rules matter if the exemption has ended:
- The duty to tell. Under Sec. 11.43(f), the application form must state that you have a duty to notify the chief appraiser when your entitlement to the exemption ends.
- Back years. Under Sec. 11.43(i), if the chief appraiser finds the exemption was allowed in error in any of the 5 preceding years, the exempted value for each of those years goes back on the appraisal roll as property that escaped taxation.
Eligibility for each tax year is generally set by your qualifications on January 1 (Sec. 11.42). Whether your rented house still qualifies is a question for your appraisal district; ask, and keep the answer in writing.
So before Marcus answers the renewal notice, he can line up when his window closes, when the lease ends and where the homestead stands. Selling, renewing and holding on are all fair choices; what matters is that he chooses with those dates in view, not after the window quietly shuts.
If selling for cash fits your plan
Cash Home Advisors buys houses in Dallas–Fort Worth, Houston, San Antonio and Austin. You sell as-is, no repairs, and there are no agent commissions. We pay all closing costs.
A cash offer is usually less than the house could bring on the open market after repairs, so listing can net more if you have the time and money for it. Whichever way you sell, run your dates past a CPA first.
Asking is free, no obligation, and a real person calls you back. Ask for a cash offer, or see how the process works before you decide.
Frequently asked questions
Can I still get the capital gains exclusion if I rented out my old house?
Often, yes. IRS Publication 523 requires that you owned the home and lived in it for at least 24 months of the 5 years before the sale. Rental time inside that 5-year period that comes after the last day you lived there is not nonqualified use, so it does not shrink the exclusion. You still can't exclude the part of the gain equal to depreciation allowed or allowable after May 6, 1997.
What if I never claimed depreciation while the house was rented?
It still counts. Publication 523 says that if you didn't deduct any depreciation, you decrease your basis by the amount you could have deducted, and the exclusion does not cover gain equal to depreciation allowed or allowable. IRS Publication 527 says you may be able to correct a wrong depreciation amount by filing Form 1040-X or, if an amended return isn't allowed, by changing your accounting method. A CPA can tell you which fits your returns.
Does the home sale exclusion cover depreciation on a house I used to live in?
No. Under IRS Publication 523, you can't exclude the part of your gain equal to depreciation allowed or allowable for periods after May 6, 1997, even when the rest of the gain qualifies. In the publication's example of a former home rented out before the sale, that part is unrecaptured section 1250 gain, reported on Form 4797. Pub 523 adds that if you rented out the whole home, some or all of the depreciation may also have to be recaptured as ordinary income.
Sources
- IRS Publication 523 (2025), Selling Your Home
- IRS Publication 527 (2025), Residential Rental Property
- Texas Tax Code, Chapter 11 (Secs. 11.13(j), 11.13(l), 11.42, 11.43(f) and 11.43(i))
- Texas State Law Library, FAQ: My landlord sold the property. Can the new owner kick me out or change the lease?
General information, not legal or tax advice. Talk to a Texas attorney or CPA about your situation.