Sell it or rent it out? The full after-tax answer when you move

Every move creates the same tempting thought: keep the old house, rent it out, let a tenant pay the mortgage. Sometimes that's a great idea — especially when the house carries a 3% loan you could never replace. But the decision is routinely made on two lazy numbers (rent minus mortgage payment) when it deserves a full after-tax model with three moving parts: the true cash yield on the equity you're leaving behind, the Section 121 exclusion clock that starts burning the day you move out, and the depreciation recapture bill that begins accruing the day the tenant moves in. Run all three and the answer is often different from the gut call.

Part one: the yield on trapped equity

The question is never 'does rent cover the payment' — it's 'what does the equity earn.' Suppose your old house is worth $500,000 with a $250,000 balance at 3.25%. Selling nets about $455,000 after ~9% transaction costs, leaving ~$205,000 of investable proceeds (tax-free, as we'll see). Renting it at $2,800/month grosses $33,600; subtract vacancy (5%), management (8% if you're honest about your time), maintenance and reserves ($4,200), taxes and insurance ($7,300), and you net roughly $17,700 before debt service. After the $1,306/month P&I (~$15,700/yr), free cash flow is about $2,000 — plus roughly $6,200 of first-year principal paydown and any appreciation. Cash-on-trapped-equity: ($2,000 + $6,200) ÷ $205,000 ≈ 4% before appreciation, versus what $205,000 earns in a diversified portfolio. The 3.25% mortgage is doing heavy lifting here; at a 6.5% loan the same house would be cash-flow negative.

Part two: the Section 121 clock you start burning

Section 121 excludes up to $250,000 of gain ($500,000 married filing jointly) if you owned and used the home as your primary residence for 2 of the 5 years before sale. Move out and rent it, and a countdown starts: sell within 3 years of moving and you still qualify; hold longer and the exclusion is gone entirely. On a house with a $200,000 gain, that's up to $30,000–47,600 of capital-gains tax (15–20% federal plus state) that becomes payable the day the window closes. And a subtle trap for planners: moving back in later only partially restores the exclusion — post-2008 rules prorate the gain for periods of 'nonqualified use,' so you can't fully launder rental years by re-occupying. The 3-year mark is the decision's real deadline: rent it as an experiment if you like, but calendar the date.

Part three: the depreciation recapture preview

As a rental, you'll depreciate the building (not the land) over 27.5 years — roughly $13,100 a year on a $360,000 structure. That shelters rental income now, and you don't get to decline it: recapture at sale is computed on depreciation 'allowed or allowable.' When you eventually sell, that accumulated depreciation is taxed at up to 25% — about $3,275 of future tax accruing per year of landlording — and critically, the 121 exclusion never covers recapture. The honest way to see it: depreciation is a low-interest loan from the IRS, worth taking, but it means every year of renting builds a tax bill that only a 1031 exchange (into another rental, with its own rules) or a step-up at death ever truly erases.

The qualitative side, priced

• Your time is a cost: self-managing a remote rental is a part-time job. If you wouldn't do it for a stranger at $40/hour, put management in the model.
• Concentration: keeping the old house often means two houses in one metro — doubling down on local prices, employment, insurance, and taxes.
• The mortgage is an asset: an assumable-sized gap between your 3% loan and market rates is genuinely valuable — but only if the property cash-flows enough to let you keep it.
• Liquidity and stress: a bad tenant, a roof, and a vacancy in the same year happen. If that sequence would force a panicked sale, the position is too big.
• Landlord law: some cities make regaining possession slow and expensive. Know your jurisdiction before you hand over keys.

1. 1
   Compute net sale proceeds

   Value minus payoff minus ~8–10% transaction costs. This is the equity actually in play.

2. 2
   Build the real rental P&L

   Market rent minus vacancy, management, maintenance reserves, taxes, insurance, and debt service — not rent minus payment.

3. 3
   Yield the equity

   (Cash flow + principal paydown) ÷ trapped equity, compared against your portfolio's expected return, with appreciation as the swing factor on both sides.

4. 4
   Price the tax path

   Gain size, 121 deadline date, and annual recapture accrual. Big gain + high bracket pushes hard toward selling inside the window.

5. 5
   Decide by a date

   Rent as a test if the yield is close, with a written go/no-go at month 30. Inertia is the most expensive strategy.

The bottom line

Keeping the old house is a leveraged, concentrated, tax-clocked investment decision wearing the costume of 'not deciding.' It wins when the numbers say so: a low-rate mortgage worth preserving, genuine cash flow after honest expenses, a modest gain that makes the 121 clock cheap to burn, and an owner who actually wants to be a landlord. It loses when a large tax-free gain sits on the table while a marginal rental earns 4% on trapped equity. Run the yield, calendar the three-year deadline, preview the recapture — and if you do keep it, keep it on purpose.