What renting your condo does to the capital gains exclusion

Most writing on this question answers it with the two-out-of-five-years rule and stops. That rule decides whether you qualify at all, and it is the easy half. The hard half is a 2008 amendment that decides how much of the exclusion survives, and it turns on something nobody thinks to ask about: whether you rented the unit before you lived in it or after. Two sellers with identical purchase prices, identical sale prices, identical years of residence and identical years of rental can owe federal tax about $15,900 apart, and the only difference between them is the order.

Published September 15, 2026

This page explains a federal statute. It is not tax advice, it does not know your basis, your filing status or your other income, and the arithmetic below is an illustration rather than a return. The number that matters in your case comes from a CPA who has your documents. What this page can do is tell you which questions change the answer, so that conversation starts in the right place.

1. The test that decides whether you qualify

Section 121(a) is one sentence, and it is worth reading in its own words: gross income does not include gain from the sale of property if, during the five-year period ending on the date of sale, the property was owned and used by the taxpayer as a principal residence for periods aggregating two years or more.

Four things in that sentence do work people miss.

• Two years, not two consecutive years. The statute says "periods aggregating," so a year here and a year there inside the window both count.
• Owned and used. Both, and they do not have to be the same two years — only both satisfied somewhere inside the five.
• The window ends at the sale. It runs backward from the closing date, not forward from the purchase.
• Once every two years. Section 121(b)(3) bars the exclusion entirely if you already used it on another sale in the two years before this one.

Clear that and the cap is $250,000 of gain for a single filer under section 121(b)(1), or $500,000 for a married couple filing jointly under section 121(b)(2) — for which either spouse may meet the ownership test but both must meet the use test.

2. The amendment that decides how much survives

The Housing Assistance Tax Act of 2008 added section 121(b)(5), and it is the provision this whole page exists for. Its rule: gain allocated to "periods of nonqualified use" does not get excluded, and the allocation is a straight ratio — aggregate periods of nonqualified use during your ownership, over the total period you owned it.

A period of nonqualified use is any period the property was not your principal residence. Then come the exceptions, and the first one is the whole ballgame:

Read clause (ii)(I) again, because it creates an asymmetry that almost no summary of this rule mentions. Renting after you lived there is protected. Renting before you lived there is not. The statute is indifferent to how many years you rented; it cares where those years sit relative to your residence.

3. The same numbers in both orders

Take one condominium, bought in January 2019 for $600,000 and sold in December 2025 for $900,000. Seven years of ownership, four years lived in, three years rented, a $300,000 gain, a single filer. Only the order changes.

Order A — lived in it first, then rented it

Principal residence January 2019 through December 2022. Rented January 2023 through December 2025. The five-year lookback runs from December 2020, and it contains two full years of principal residence use, so the section 121(a) test is met with nothing to spare.

Now apply (b)(5). The last date of principal residence use is December 2022. Every one of the three rental years falls after that date and inside the five-year window, so clause (ii)(I) removes all of them. Nonqualified use: zero.

Order B — rented it first, then lived in it

Rented January 2019 through December 2021. Principal residence January 2022 through December 2025. The section 121(a) test is met comfortably — four of the last five years.

But the three rental years now sit before the residence, so clause (ii)(I) does not reach them, they are after January 1, 2009, and no other exception applies. Nonqualified use: three years out of seven owned, a ratio of 3/7.

4. What that costs, line by line

Both sellers depreciated the unit over the three rental years. Land is not depreciable, so only the improvement is — say $480,000 of the $600,000 purchase, straight line over 27.5 years, which is $17,455 a year and $52,364 over three. (Real returns apply a mid-month convention in the first and last year, which moves that figure slightly without changing the shape of anything below.)

Depreciation comes off the top for both of them. Section 121(d)(6) says the exclusion does not apply to gain up to the amount of depreciation taken after May 6, 1997, and Publication 523 puts it as gain that "must be recaptured." That slice is unrecaptured section 1250 gain, and IRS Topic no. 409 gives its ceiling: taxed at a maximum 25% rate.

The gap is $15,919, which is exactly the tax on the nonqualified slice. Neither seller is anywhere near the $250,000 ceiling — the cap never binds in either case. What costs Order B the money is not the size of the gain. It is that three of the seven years were rental years standing in the wrong place.

Both figures are federal only. Florida levies no personal income tax, a prohibition that sits in Article VII of the state constitution rather than in a statute a legislature can revisit, so for a Florida property there is no second layer underneath. Depending on your other income, the net investment income tax may add a further 3.8% to some or all of this; that turns on your modified adjusted gross income and not on anything about the property.

5. Three traps worth knowing before you call anybody

Depreciation you never claimed still comes back. Publication 523 recaptures depreciation "allowed or allowable." If the unit was rented and you did not depreciate it, the recapture is calculated on what you could have taken. Skipping the deduction does not skip the tax — it just means you paid for the privilege twice.

The clock runs on your last day of residence, not your closing date. Clause (ii)(I) only protects rental time that falls inside the five-year window. Rent the unit for six years after moving out and the two-year use test fails outright, and the exclusion is gone entirely rather than reduced.

If you are a foreign seller, this is a separate question from withholding. Section 121 turns on use of the property, not on citizenship. FIRPTA withholding turns on the seller's status and is calculated on the sale price rather than the gain, which means it can take a five-figure sum out of a closing on which little or no tax is ultimately owed. Those two rules run on different tracks and are handled at different moments — FIRPTA is its own page.

6. What to take to your accountant

Four dates and two numbers settle almost everything above, and you can assemble them without professional help:

• The date you took title and the date of the closing on the sale.
• Every date the unit started and stopped being your principal residence.
• Every date it was rented, or held out for rent.
• Your purchase price, plus capital improvements, and the closing costs on both ends.
• The land-versus-improvement split you used for depreciation. The Miami-Dade Property Appraiser publishes land value and building value separately on each folio, which is one documented starting point for that allocation rather than a figure invented at the last minute.
• Every depreciation deduction taken, from the depreciation schedules on the returns for the rental years.

An accountant given that list can finish in an hour. An accountant given a closing statement and a shrug spends the hour reconstructing it.