She Moves Into Assisted Living in 2027 and Rents Out the House. She Collects Rent Until 2030, Then Sells, and the First $250,000 of Gain Is Tax-Free
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A homeowner who moves into assisted living can rent out the home for years and still claim the federal capital gains exclusion when they sell. The exclusion requires two years of residence within the five years before the sale date, and that residence can be as far back as three years. A single seller who meets the test excludes up to $250,000 of gain, even after collecting rent for years.
Timing shapes everything in this calculation. The S&P Cotality Case-Shiller National Home Price Index stood at 337.3 in July 2026, measured against a baseline of 100 in January 2000, meaning a home that sold at the index level in 2000 would fetch more than three times that price today. Millions of long-term owners carry enormous embedded gains as a result. Yet moving those gains across the closing table is proving harder than expected: existing-home sales ran at only 3.99 million in September 2026, down 2.2% from a year earlier, with pending contracts falling 7.3% to a record low the same month. In a slow and tightening market, controlling the closing date becomes a genuine risk.
How a Rental House Keeps Its Tax-Free Status
A homeowner who moves out in 2027, rents the house, and sells in 2030 qualifies for the exclusion if she lived there at least two years before moving out and schedules closing within three years of that move-out date. Rental years do not shrink the exclusion. Under the tax code, rental use that follows the last day of principal residence falls outside the rule that normally reduces the exclusion for nonresidential time, so three years of rental income do not cost the seller a dollar of the exemption.
Where the Tax Code Spells It Out
Under Internal Revenue Code §121(a), gain is excluded if the property was “owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more” during the 5-year period ending on the sale date. Section 121(b)(1) caps the exclusion at $250,000 for a single filer; married couples filing jointly can exclude up to $500,000. Section 121(b)(5)(C)(ii)(I) excludes from nonqualified use “any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer.” The exclusion applies to sales that took place after May 6, 1997, and the $250,000/$500,000 caps have not been adjusted for inflation since enactment. No legislation in 2026 changed the limits.
Who Qualifies and Who Gets Shut Out
- Sellers who owned and lived in the home for at least two of the five years before the sale.
- Sellers who have not used the exclusion on another sale during the 2-year period before this one.
- Married couples get the higher cap only if both spouses meet the use test and at least one meets the ownership test.
Sellers who leased before living in the home get less protection. Time as a rental before residence, counted from January 1, 2009, constitutes nonqualified use and reduces the exclusion proportionally. Sellers who close after the three-year mark lose the exclusion entirely. One relief provision matters here: under §121(d)(7), a homeowner who becomes unable to care for herself needs only 1 year of residence (rather than two) within the 5-year window, and time spent in a licensed care facility counts as time living in the home.
How the 2027 to 2030 Timeline Works
- Document the move-out date with facility intake records and the first signed lease.
- Confirm at least two years of residence before that date.
- Report rental income and expenses on Schedule E each year. Depreciation on the building begins once the property is placed in service as a rental.
- Schedule closing before the third anniversary of move-out. Listing earlier is prudent in a soft market.
- Report the sale on Form 8949 and Schedule D, with depreciation recapture shown separately.
Depreciation and Deadline Traps That Cost Sellers
Depreciation is the main exception to the exclusion’s reach. Section 121(d)(6) makes depreciation recapture taxable regardless of the exclusion, so the $250,000 shelter never covers rental-period depreciation. The rule applies to depreciation claimed or that could have been claimed, meaning a seller who skips the deduction still owes the recapture tax. This portion of gain, known as unrecaptured §1250 gain, faces a maximum federal rate of 25%. Rental income collected each year is taxed as ordinary income on the return for that year.
The deadline trap works differently but costs just as much. If move-out falls in early 2027 and closing slips to late 2030, the five-year lookback window no longer contains two full years of residence. The full exclusion is gone, not a fraction of it. That risk is real in today’s market. Existing-home sales fell to 3.93 million in August 2026 (revised) and edged up to only 3.99 million in September, remaining well below the pace of prior years. Pending contracts fell 7.3% in September to a record low, which points to continued pressure on closing volumes late in the year. A buyer’s financing delay or a failed inspection can push a sale past the hard deadline.
Families planning this path focus on three numbers: the documented move-out date, the cumulative depreciation built up on the rental property, and a closing date set comfortably inside the three-year limit. The $250,000 cap is fixed by statute, and any revision would require an act of Congress.
Editor’s note: This article updates the Case-Shiller National Home Price Index figure to the July 2026 reading of 337.3, adds September 2026 existing-home sales data (3.99 million annual rate, down 2.2% year over year) and the record-low pending-contracts reading, and notes that 2026 legislation did not alter the §121 exclusion caps.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
