After a live-in flip crosses two years, what does it cost to rent instead of sell
Consider a live-in flip at the two year one month mark. Bought at $268k, roughly $74k of work, basis call it $350k with closing costs. Comps sit at $470k. For a married couple filing jointly, the gain sits well inside the Section 121 exclusion if the sale happens now. But say the same floor plan two doors down leases at $2,950 while the payment on the subject property is $1,880 including taxes and insurance. That reads as a better rental than most of what's already in a typical portfolio, and the pull to add a good unit instead of taking a check is real. The framework that matters: the exclusion needs two of the last five years of ownership and use, so once the owners move out, there is a window of roughly three years where a sale would still qualify. Rent for two, sell in year four, and the position is still inside the window. Three points worth working through carefully before betting on that plan. First, whether renting after moving out reduces the exclusion. Periods of rental before the owner lives there generally hurt the exclusion, periods after generally don't, and that distinction is worth verifying against the actual rule rather than a paraphrase. Second, depreciation. Renting for two years at roughly $12k a year of depreciation on the building raises the question of whether that comes back at sale even when the rest of the gain is excluded, and the answer is that unrecaptured depreciation is generally taxed at sale regardless of the exclusion. Third, whether the rent is worth the complexity at all. Two years of $2,950 against a $1,880 payment is about $25k of cash flow before vacancy and repairs, set against a tax position worth considerably more than $25k if the rules get misapplied. The safer path is to confirm the depreciation recapture and rental-period rules with a CPA before committing to the fall move-out over the clean spring sale.
