Converting Your Primary Home to a Rental Property: Important Considerations

Converting Your Primary Home to a Rental Property: Important Considerations

If you own a smaller primary home and are contemplating converting it into a rental property while purchasing a larger property, there are a few crucial aspects to keep in mind. In this article, we will discuss two essential pieces of advice for transitioning your primary home into an investment property. By understanding these key points, you can ensure a smooth and legally compliant conversion while maximizing potential tax benefits.

1. Removing the Homestead Exemption:
When converting your primary home into a rental property, it's important to remove the homestead exemption. The homestead exemption provides property tax benefits exclusively for your primary residence. If you attempt to retain the exemption on your previous home while designating another property as your primary residence, you could face legal consequences for homestead fraud. To avoid such issues, update your driver's license and official documents to reflect your new primary residence, and apply the homestead exemption solely to the property you currently live in.

2. Consider the Capital Gains Tax Exemption:
One significant advantage of retaining a property as your primary home for at least two years within the last five years is the potential capital gains tax exemption. When selling a primary residence, homeowners who have lived in the property for at least two years within the last five years are eligible for a tax exemption of up to $250,000 per person or $500,000 for married couples filing jointly. This means that any profits made from the sale of the primary residence within these limits are tax-free. However, by converting your primary home into a rental property and subsequently selling it, you may lose this valuable tax benefit. It is crucial to consult with a qualified accountant to fully understand the tax implications and determine the best course of action based on your specific circumstances.

Transitioning your primary home into a rental property requires careful consideration of legal and tax implications. By removing the homestead exemption from the converted property and understanding the potential loss of capital gains tax benefits, you can avoid legal issues and make informed decisions regarding your real estate investments. Consulting with an experienced accountant or tax professional is essential to fully comprehend the tax consequences and optimize your financial strategies.