Rent vs Sell Calculator

Rent vs sell: the framework

Every homeowner with equity eventually asks this question. Selling hands you a lump of tax-advantaged cash today. Renting turns your home into a leveraged, cash-flowing, appreciating asset, but it traps your equity and hands you a second job. The honest answer is never universal. It depends on your equity position, your local rent-to-price ratio, your mortgage rate, your tax picture, and how long you're willing to hold.

The two numbers that decide it

Sell IRR is what you can earn on today's net sale proceeds if you redeploy them at your target return. Simple, liquid, and taxed once at Section 121-favored rates if you qualify.

Keep IRR is the annualized return on that same equity if you convert to a rental. It combines four sources of return: monthly after-tax cash flow, principal paydown from the tenant's rent, appreciation on a leveraged asset, and depreciation shielding some of the income from tax. It's usually higher than the sell IRR on paper, but only for owners willing to manage a property or hire it out.

The Section 121 clock is real

If you've lived in the home 2 of the last 5 years, a single filer can exclude $250,000 of gain from tax when you sell ($500,000 married). This is one of the most valuable tax breaks in the code. Convert to a rental and the clock starts. If it takes you 4 more years to sell, you lose the exclusion entirely and pay long-term capital gains plus depreciation recapture. On a home with $200k of gain, that can mean $30k to $60k more in tax. Don't ignore it.

When selling usually wins

• Big Section 121 exclusion still available and large realized gain.
• Weak rent-to-price ratio. Rent below ~0.5% of value per month makes the cash flow marginal.
• High-rate mortgage that eats the operating margin.
• You don't want to be a landlord. Time and stress have a cost the spreadsheet doesn't show.
• Strong alternative investment return (7%+ with confidence).

When keeping usually wins

• Low-rate legacy mortgage (3-4%) you'd never re-underwrite today.
• Strong rent-to-price ratio (0.7%+ of value per month).
• Long hold horizon. Principal paydown and appreciation compound.
• High marginal tax bracket. The depreciation shield is more valuable.
• Path to a 1031 exchange down the road to defer gains indefinitely.

Glossary

• Section 121: IRS exclusion of up to $250k / $500k of capital gain on the sale of a primary residence.
• Depreciation recapture: tax owed on the depreciation you took while renting, up to 25% at sale.
• NOI: Net Operating Income. Rent minus operating expenses, before debt service.
• Cash-on-cash return: annual after-tax cash flow divided by the equity left in the property.
• IRR: Internal Rate of Return. The annualized return that makes all future cash flows equal your starting investment.
• 1031 exchange: deferring capital gains by rolling the sale proceeds into another investment property.