Friday, January 20, 2023 / by Shane Kilby
Should you sell your primary residence or turn it into a rental property?
If you’ve been paying attention to the news, you know that inflation is high and the cost of living is increasing almost everywhere. At the same time, home values are increasing, and property taxes are rising with them. If you want to make a wise real estate decision in this environment, what should you do?
There are two main ways for homeowners to get value out of their current properties. First, you can sell the home and get your equity out of it. However, a less conventional strategy is becoming more popular in our area: converting your primary residence into a rental.
How do you do that? First, you need to speak with your lender if you haven’t paid off your mortgage. You typically can’t use a primary residence loan for investment purposes, so you may have to change the terms of your mortgage or wait until it is paid in full. Also, you must have lived in your home for at least 12 months before converting it into a rental. Finally, check local laws and HOA regulations to make sure it’s legal for you to make this switch.
"Converting your home into a rental could make all of your rental income tax-free."
There are also many tax benefits to rentals. Unlike primary residences, there are a lot of deductions that rentals may qualify for, including advertising, repairs, cleaning, and maintenance. However, the most important tax benefit is the depreciation expense. This is an exemption for general wear and tear, and it could make all of your rental income tax-free.
Unfortunately, there are some cons to turning your primary residence into a rental. Maintaining a rental can be a full-time job unless you pay a property management company to do it for you. Also, you forfeit the ability to exempt yourself from capital gain taxes when you eventually sell. You can get around this using a 1031 exchange, but you’d have to use the funds to purchase another investment property, so your options are limited.
The truth is that whether or not it makes sense to convert your primary residence into a rental depends on your situation. If you’d like to discuss the topic further, don’t hesitate to call or email me. I’d love to talk things over with you.