Home Used as a Rental (Reg. §1.121-1(C)(4))
There are specific criteria, set forth by the IRS, that landlords must meet in order for rental homes to qualify for the home sale gain exclusion.
The fact that a home is rented for some period does not preclude the home sale from qualifying for the exclusion, provided the nonqualified use rules discussed above do not apply. If the ownership and use tests are satisfied, the exclusion can be used (but will be limited if there has been nonqualified use). However, any gain to the extent of the depreciation taken after May 6, 1997, would not be excludable and would be treated as §1250 gain.
“ Example – Home Used as a Rental - Taxpayer A owned and used his house as his principal residence from 2006 until January 31, 2020, when A moved to another state. A rents his house to tenants from that date until April 18, 2022, when he sells it. A is eligible for the section 121 exclusion because he has owned and used the house as his principal residence for at least 2 of the 5 years preceding the sale. The taxpayer will not run afoul of the nonqualified use rule that would limit exclusion of gain from the sale because he meets the exception of not using the house as his principal residence from the time he moved out of the house, and it was sold. ”
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