Section 121 Exclusion Calculator

A single filer buys a house on June 1, 2016 for a cost basis of $400,000, rents it out for five years and moves in on June 1, 2021. Depreciation over the rental years comes to $55,000. The house sells for $720,000 on June 15, 2026, with $43,200 of selling costs, for a gain of $331,800.00.

The owner lived there for 1,826 days of the last five years, so both tests are met. The $55,000.00 of depreciation is taxable whatever happens. Of the 3,666 days owned, 1,826 were rental days after 2008, or 49.8%, so $137,871.47 of the remaining gain is nonqualified use. That leaves $138,928.53 excluded and $192,871.47 taxable, for $36,683.84 of federal tax with $95,000 of other income.

The order of the years matters. Here is the same house, gain and depreciation with the rental years placed differently:

Moving in for just over two years still qualifies, but $220,624.55 of the gain is nonqualified use. Living there first and renting it out afterwards counts no nonqualified use at all, because days after you move out that fall within the five years before the sale are excepted. The exclusion then reaches the $250,000.00 limit, and only the depreciation and the $26,800.00 over the limit are taxed. Rent it out for too long after moving out, though, and the use test fails: with five years of rental before the sale, nothing is excluded.

A period of nonqualified use is any time after December 31, 2008 when neither you nor your spouse (or former spouse) used the home as your main home: rented out, vacant or used as a second home. Three kinds of time aren't counted:

• Time after you move out that falls within the 5 years ending on the sale date. This is why renting out a former home for up to three years before selling doesn't reduce the exclusion.
• Qualified official extended duty for members of the uniformed services or the Foreign Service, employees of the intelligence community and Peace Corps workers, up to 10 years in total.
• A temporary absence because of a change of employment, a health condition or other unforeseen circumstances, up to 2 years in total. This estimate excepts the first 2 years of a longer absence and counts the rest.

Time before 2009 is never nonqualified use, so a rental you bought long ago and moved into later keeps more of its exclusion than one bought recently. The days before 2009 still count in the total days owned.

The exclusion isn't available, and the calculator shows none, if you fail the ownership or the use test, if you excluded gain on another home you sold in the 2 years before this sale, or if you acquired the home in a like-kind exchange and sell it within 5 years of acquiring it.

Some sellers who fail the tests can still claim a reduced exclusion, when the main reason for the sale was a change of place of employment, health or unforeseen circumstances. Members of the uniformed services or the Foreign Service, intelligence community employees and Peace Corps workers on qualified official extended duty can also choose to suspend the 5-year period for up to 10 years. The calculator doesn't figure either; Publication 523 explains both.

On a joint return the $500,000 limit needs either spouse to meet the ownership test and both to meet the use test. When only one spouse meets the use test, the calculator uses the $250,000 limit.

A home that was a rental can still qualify for the exclusion, but the depreciation and the share of the gain from nonqualified use stay taxable. In the example, $138,928.53 of a $331,800.00 gain is excluded and $192,871.47 is taxed.

Enter your own dates in the Section 121 exclusion calculator, and use the rental property depreciation calculator to work out the depreciation from your rental years. This estimate uses the day counts and limits described above; a tax professional can confirm how they apply to your sale.