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Business or Rental Use of Home — Exceptions: Home Sale Taxes (2025 IRS Guide)

This guide covers “Business or Rental Use of Home — Exceptions” within home sale taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 523 (2025), Selling Your Home, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Subtract the adjusted basis from the amount realized to get your gain or loss.

A positive number indicates a gain; a negative number indicates a loss.

Certain events during your ownership, such as use of your home for business purposes or your making improvements to it, can affect your gain or loss. They are explained in this section.

See Worksheet 2, later, for steps you should follow to figure your gain or loss.

Business or Rental Use of Home — Exceptions

Exceptions.

A period of nonqualified use does not include:

  1. Any portion of the 5-year period ending on the date of the sale or exchange after the last date you or your spouse (or former spouse) used the property as your main home;

  2. Any period (not to exceed 10 years) during which you (or your spouse) are serving on qualified official extended duty:

    • a. As a member of the uniformed services;

    • b. As a member of the Foreign Service of the United States; or

    • c. As an employee of the intelligence community; and

  3. Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or other unforeseen circumstances as may be specified by the IRS. See Eligibility Step 5 Exceptions to the Eligibility Test, and Does Your Home Sale Qualify for the Exclusion of Gain?, earlier.

Gain from depreciation for periods after May 6, 1997, isn't taken into account to determine gain from nonqualified use. Such gain is not accounted for in determining the amount of gain allocated to nonqualified use. To figure the portion of the gain allocated to the period of nonqualified use, see Worksheet 3.

Example.

Finley buys a property on January 1, 2020, for $400,000 and uses the entire property as rental property for 2 years, claiming $20,000 of depreciation deductions and reducing the property’s basis to $380,000. On January 1, 2022, Finley converts the property to a principal residence. Finley moves out on January 1, 2024, and sells the property for $700,000 on January 1, 2025. The total gain on the sale is $320,000 ($700,000 − ($400,000 − $20,000)). Finley completes Worksheet 2, and enters $20,000 on line 5a so that line 7 reports $320,000.

Finley transfers the $320,000 net gain from line 7 of Worksheet 2 to Worksheet 3. Finley completes Section A of Worksheet 3 and takes the amount from line 7 of Worksheet 2, $320,000, and subtracts $20,000 for depreciation. Finley enters $300,000 ($320,000 - $20,000 depreciation) in Step 3 (Section A). Moving to Section B of Worksheet 3, Finley has $300,000 in net gain that is potentially excluded, except for the period of nonqualified use. The rental period occurred for 2 out of 5 years that Finley owned the property and met the use test by using the home as a principal residence for 2 years (January 1, 2022, to January 1, 2024). Note that the rental period occurred before Finley moved back into the home to fulfill the required 2-year personal use requirement.

In Section B of Worksheet 3, Finley allocates 40% (2/5, or 2 years out of 5) of the remaining $300,000 gain, or $120,000, to nonqualified use ($300,000 - $120,000 = $180,000). The $120,000 nonqualified use gain is ineligible for the section 121 exclusion and is reported as long-term capital gain on Schedule D (Form 1040). The $180,000 of the remaining gain is excluded from gross income, as reported in Section C of Worksheet 3. The balance of the $250,000 exclusion can’t be used. The $20,000 attributable to the depreciation deduction is subject to recapture under section 1250. See Determine any depreciation amounts you may need to recapture to figure the amount to report as ordinary income on Form 4797. For information on reporting $120,000 of nonqualified use gain (long-term capital gain), see the Instructions for Schedule D (Form 1040).

Example.

Taylor buys a residence on January 1, 2020, for $400,000 and immediately begins using it as a principal residence. Taylor moves out on January 1, 2023, and immediately begins to rent the home. On December 1, 2024, Taylor sells the property for $600,000. Based on the facts presented, note that the rental period after Taylor’s last qualified use is not considered nonqualified use because nonqualified use during the 5-year period ending on the date of the sale doesn’t include the time between when Taylor last used the property as Taylor’s principal residence and when Taylor sold the property. See section 121(b)(5)(C)(ii). Because Taylor met the ownership and use tests, Taylor can exclude gain up to $250,000. Taylor had deducted $27,000 for depreciation for the period of rental to a third party. Taylor can’t exclude the part of the gain equal to the depreciation claimed after May 6, 1997, for renting the house ($27,000). This is unrecaptured section 1250 gain.

After subtracting depreciation from net gain, Taylor’s net gain reported in Worksheet 3, Section A, Step 3 is $200,000, calculated as follows: Taylor had completed Worksheet 2 and reported $600,000 on line 1, $400,000 on line 4a, and $27,000 on line 5a. Taylor computed figures on Worksheet 2 and reported $227,000 on line 7 ($600,000 - ($400,000 - $27,000)). Taylor transferred the result from line 7 to Worksheet 3. Taylor completed Section A to enter net gain and subtract the $27,000 of depreciation deductions taken. Taylor entered $200,000 in Step 3 of Section A. Taylor skipped Section B because there is no nonqualified use based on the exception under section 121(b)(5)(C)(ii). Taylor completed Section C for the column “you completed Section A but skipped Section B” and took the figure from Section A, Step 3 and entered $200,000. The entire $200,000 gain is excludable from gross income because any period after the last qualified use doesn’t constitute nonqualified use.

After subtracting depreciation from net gain in Worksheet 2, line 7, if Taylor’s net gain had exceeded the maximum exclusion amount for a single filer, any capital gain above the threshold ($250,000) would have been reported on Schedule D (Form 1040) as long-term capital gain. However, Taylor must report the $27,000 depreciation on Form 4797. See the Instructions for Form 4797. For information on the treatment of unrecaptured section 1250 gain, see Recapturing Depreciation, later. See also Pub. 544 for information on depreciation recapture.

For more information about using any part of your home for business or as a rental property, including information about depreciation deductions, see Pub. 587, Business Use of Your Home, and Pub. 527, Residential Rental Property. See also Pub. 946, How to Depreciate Property.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.

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