Should I sell my house or rent it out?

Last updated August 31, 2026

By Cade Cashman, Principal Agent, Ascension Estates at Equity Union Real Estate. DRE #02222044.

Run the numbers both ways before you decide anything. A rental has to clear the mortgage, taxes, insurance, repairs, empty months and management before it pays you a dollar. Selling turns your equity into cash today. If you plan to move back within a few years, renting can be the right call. If you are leaving for good, a tax clock starts the day you move out, and it usually favors selling within 3 years.

What does a rental actually clear each month?

Most owners compare the rent to the mortgage payment and stop there. That comparison is wrong. Rent is revenue. You have to take every cost out of it before you know what the rental earns.

Here is the full list of what comes out of the rent.

Now run one example. Every number here is made up to show the arithmetic. Yours will be different, so pull your own statement and real rental comps before you decide.

Say the house would rent for $5,500 a month, which is $66,000 a year. Assume one empty month, so you collect $60,500. Say your mortgage payment with taxes and insurance is $3,900 a month, or $46,800 a year. Put $450 a month into the repair reserve, which is $5,400. Pay a manager 8 percent of collected rent, which is $4,840. What is left is $3,460 for the year. That is under $300 a month for owning a business with one very expensive asset.

Then ask the question that actually decides this. What is that $3,460 earning on? If you have $700,000 of equity locked in the house, $3,460 a year is about half of one percent on your money. The rental also pays you in two quieter ways, principal paydown and any price growth. Add those in honestly. Then compare the total to what the same equity could do somewhere else, or what it could do as the down payment on your next home.

Cash flow is only half the math. The other half is tax, and the tax side has a clock on it.

Do I lose the capital gains exclusion if I rent my house out?

This is the rule that decides the question for many owners, and most accidental landlords have never heard of it.

Federal law lets you exclude up to $250,000 of gain when you sell your main home, or up to $500,000 if you are married filing jointly. The rule is Internal Revenue Code Section 121. To qualify, you must have owned the home and lived in it as your main home for at least 2 of the 5 years ending on the date of sale. California follows the same rule. Our capital gains article walks through the whole thing.

Watch what happens to that 5 year window when you move out and rent the house.

• Sell within 3 years of moving out and you can still pass, as long as you lived there at least 2 of the 5 years before the sale.
• Sell more than 3 years after moving out and you fail the use test. The years you lived there have slid out of the window. The exclusion is generally gone.

On a long held home here, that exclusion can be worth six figures of sheltered gain. Renting the house "for a while" and losing track of the calendar is one of the most expensive quiet mistakes a homeowner can make. If you rent it out, put the 3 year date in your calendar the day the tenant moves in, and talk to your CPA a year before you reach it.

One more wrinkle. The order matters. If you rented the house out first and moved in later, a separate proration rule can reduce the exclusion even when you pass the 2 year test. That calculation belongs with your CPA.

What is depreciation recapture?

This is the tax that surprises accidental landlords, because it arrives years after the choice that caused it.

When you rent out a property, you depreciate it on your tax return. Depreciation lowers your taxable rental income each year. It also lowers your basis in the house. Lower basis means bigger gain when you sell.

At sale, two things happen to the depreciation you took.

• The Section 121 exclusion cannot shelter it. Depreciation taken after May 6, 1997 is taxable even when the rest of your gain fits inside the exclusion.
• It is taxed at its own rate. Federally, that piece is unrecaptured Section 1250 gain, taxed at a maximum rate of 25 percent. California has no special rate, so the state taxes it as ordinary income like everything else.

Here is the part people refuse to believe. The rule counts depreciation you were allowed to take, whether or not you claimed it. Skipping the deduction does not protect you at sale. It only means you paid more tax during the rental years and still owe the recapture later. If you rent the house out, take the depreciation, keep the schedules, and hand them to your CPA before you ever list.

What does being a landlord in California actually involve?

California regulates rentals more than most states. Learn the rules before the first tenant, because the rules shape what the rental can earn.

The statewide law is AB 1482, the Tenant Protection Act. For covered properties it does two things. It caps annual rent increases at 5 percent plus regional inflation, with a hard ceiling of 10 percent. And it requires a stated just cause to end a tenancy once the tenant has been there long enough, which for no-fault terminations can include paying relocation assistance.

Some single family homes are exempt from AB 1482 when the owner is an individual rather than a corporation or a REIT, and only if the lease includes the exact exemption notice the statute requires. Miss the notice and a house that could have been exempt is covered. Cities can also layer their own rules on top, and the City of Los Angeles has rent stabilization that is stricter than the state law for the units it covers.

Two practical points follow from that. First, the inflation part of the cap changes every year and varies by county, so verify the current allowed increase with the State of California or a landlord attorney before you set a renewal rent. Second, your lease is a legal document that decides whether exemptions apply, so have a professional prepare it. Do not price your rental plan on the assumption that you can raise the rent to market whenever you like.

What happens to my property taxes if I hold?

Here is the strongest honest argument for keeping the house. Under Proposition 13, your assessed value can rise at most 2 percent a year while you own it. A home held for decades carries a property tax bill far below what a new buyer of the same house would pay. Renting the house out does not reset it.

That low bill is part of what makes the rental math work for long tenured owners. It is also a real thing you give up when you sell, unless you qualify to move your tax base under Prop 19, which is a separate question with its own rules.

Hold long enough and one more piece of current law matters. Under present federal law, when an owner dies, the heirs generally receive the property at a stepped up basis. Families with a very low basis and no need for the cash sometimes hold for exactly that reason. That is an estate planning decision. Make it with a CPA and an estate attorney, on purpose, in writing.

When does renting it out win?

Renting genuinely wins in a few specific situations.

• You are coming back. A two year job posting, a family obligation, a trial move. Rent covers the carry while you are gone, and if you sell within 3 years of moving out, the exclusion survives. The clock protects a short gap. It punishes an open ended one.
• Your basis is very low and you do not need the cash. Your gain may be far past the exclusion anyway, your Prop 13 bill is small, and the rent clears your costs with room to spare. Owners in this spot are choosing between good outcomes, and holding is often one of them.
• The rent comfortably beats the full cost list above. Run the arithmetic from the top of this page with your real numbers. If the house clears real money after every line, including vacancy and your own time, it can stand on its own as an investment.

When does selling win?

Selling wins more often than sellers-turned-landlords expect.

• You need the equity for the next house. Locked up equity cannot make a down payment. Carrying two mortgages to keep a marginal rental strains most budgets fast.
• You are leaving for good. The 3 year clock runs whether or not you watch it. If there is no plan to return, you are trading a certain exclusion today for uncertain rent tomorrow.
• The rental math barely clears, or clears only if nothing breaks. A rental that earns half a percent on your equity is a hobby with liability attached.
• You do not want the job. Being a landlord is work with legal exposure. There is no shame in declining a part time job you never applied for.

There is also a middle path. Waiting can be right when you wait on purpose, with the numbers in front of you, and we wrote a whole page on when waiting wins and what it costs. That is one of the three exits we price for every seller, list on the open market, take a verified cash offer, or wait with a plan.

One honest limitation. We cannot tell you what your house rents for, and neither can a formula. Rents move, and they vary block by block. Get real numbers from comparable rentals actually leased near you, not asking prices, before you trust any projection. The tax rules above are stable law, but the dollar results depend entirely on your own basis and dates.

Start with the sale side, because it is the side you can pin down this week. The home value report gives you a projected list price for your address, your net after every cost, and a real cash offer range. Put that number next to your honest rental math and the decision usually makes itself.

This is not tax advice and it is not legal advice. The Section 121 exclusion, depreciation recapture and AB 1482 all have exceptions and details this page does not cover. Talk to your CPA before you rent out or sell a home you have lived in, and talk to a landlord attorney before you sign a lease with a tenant.