Rental and later sale of former home

If you have lived in a home for two of the last five years you can exclude all or part of any profit under §121.
The two years do not have to be the most recent two years.
Your profit, if any, is the sales price minus the cost after reducing the cost for any depreciation taken.
If you rented the house or used part of it as a home office the depreciation taken would reduce your cost for purposes of calculating profit.

Suppose you paid $ 200,000 for the house and took $ 10,000 depreciation so your basis would be $ 190,000.  If you sold it for $ 220,000 Your profit would be $220,000 - $ 190,000 or $ 30,000.

However, due to §121 you would only have to pay tax on the $10,000 depreciation you had taken.

If you carry the mortgage on the sale, you could report it on the installment basis you would stretch out the tax on the profit over the life of the mortgage and only report 10,000/220,000 or 4.545% of the principal collected each year.  By carrying the mortgage yourself, you would, of course, be collecting interest which would be fully taxable.

NOTE: The exclusion is not unlimited.  A single taxpayer is limited to a $250,000 exclusion and if married filing jointly the exclusion is limited to $ 500,000.