Owner-Occupied to Rental Conversion Calculator
Converting your home to a rental can be lucrative — but the §121 capital gains exclusion ($250K single / $500K married) phases out 3 years after you stop living there. Calculate cash flow, tax depreciation, and the optimal exit timing.
| Tax Basis | — |
| Current Value | — |
| Monthly Cash Flow | — |
| Annual Cash Flow | — |
| Annual Depreciation Deduction | — |
| Capital Gain at Sale | — |
| §121 Exclusion Available | — |
| Taxable Capital Gain | — |
| Depreciation Recapture | — |
| LTCG Tax | — |
| Total Tax at Sale | — |
The §121 Exclusion — 2-of-5 Year Rule
IRC §121 lets homeowners exclude up to $250K (single) or $500K (married filing jointly) of capital gain from the sale of a primary residence. You must have owned and lived in the home as your primary residence for at least 2 of the last 5 years before sale.
After you move out, the 5-year clock starts. Sell within 3 years of moving out and you keep the full exclusion. Sell after 3 years, you've fallen outside the 2-of-5 window — full gain becomes taxable at LTCG rates plus depreciation recapture.
Source: irs.gov IRC §121 + IRS Pub 523
Depreciation During Rental Period
When converted to rental, the property starts depreciating over 27.5 years (residential rental). Building basis (purchase + improvements − land) is the depreciable amount. Land doesn't depreciate.
Annual deduction reduces your rental income tax. But when sold, you owe depreciation recapture tax (25% on the depreciation taken, regardless of LTCG rate). This is non-negotiable — even if you take a loss on the sale, you still owe recapture on the depreciation.
Cash Flow Reality Check
Calculate net monthly cash flow: rent − P&I − taxes − insurance − HOA (if any) − maintenance reserve (10% of rent) − vacancy reserve (5-8% of rent) − property management (8-10% if used). Many former primary residences don't cash flow positively as rentals because they were bought as owner-occupied (lower rate ratio, no rental-specific underwriting).
If cash flow is negative, the property is a 'subsidy from your bank account' — you're paying to hold an asset for appreciation. Decide whether the appreciation potential + tax shelter justify the negative cash flow.
Three Strategic Paths
Path 1 (recommended for most): Sell within 3 years of moving out. Capture §121 exclusion, lock in the tax-free gain. Best if cash flow is weak.
Path 2: Rent indefinitely, pass to heirs at death — basis steps up to fair market value, all built-in gain eliminated. Best if you don't need the cash and have a long-term mindset. Path 3: 1031 exchange — defer tax indefinitely by trading into another rental. See our 1031 exchange calculator.