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Converting Your Home into a Rental Property


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The concept of converting your primary residence into a rental property has become increasingly common the last few years.  Much of this is likely due to the troubled housing market.  That is, if you’re not able to sell your home for what it’s worth in the current real estate market, then it might make sense to hold and rent it out for a couple years until the market fully recovers.  But if you’re considering this, you must be aware of the various financial implications of doing so.

One thing to be aware of is capital gains tax regulations.  Basically, if you live in your primary home for a minimum of 2 out of the past 5 years, you can sell it for a profit without incurring any capital gains tax expense (you can sell for up to a $250K profit if you are single, and up to a $500K profit for married couples filing jointly, without incurring any capital gains liability).  And these thresholds also apply if you convert your home to a rental property.  However, in order to get this tax exemption you must sell within 3 years of the conversion.


Another tax issue relates to the numerous tax deductions for which a landlord is eligible.  You can deduct all of your day-to-day property expenses, as well as things like depreciation, mortgage interest, mileage, etc.  Thus, after you convert your home to a rental you’ll be able to legally enjoy all of these tax benefits.  However, there is one caveat: if you sell the property less than 3 years later in order to get the capital gains exemption I previously discussed, you’ll be taxed on whatever amount you took as a depreciation deduction.  In other words, you’ll have to pay it back.

Another consideration is the zoning regulations applicable to your specific street.  Simply put, you are generally only able to rent a property in areas that are designated or zoned for this purpose.  Most municipalities have their zoning maps posted online so that would be a good place to check (otherwise just visit the city hall).  Yes you might be able to get away with renting out a property in an area that is not zoned for this purpose, but eventually you will probably get caught so don’t do it.

Finally, if you plan to become a landlord you must ask yourself if you can handle it.  Simply put, it’s not easy.  You risk property damage, bringing crime into the neighborhood, inadvertently violating landlord-tenant laws, getting stiffed on the rent, and other undesirable outcomes.


The bottom line is that it only makes sense to convert your home to a rental property if you plan to sell within 3 years; if the rent payments will cover all of your property expenses; if you’re cut out to be a landlord; if the market is depressed and/or home prices are appreciating in your market at an above average rate; and if the dynamics of the neighborhood are relatively stable.  And above all, remember that I am not an accountant (but I play one on TV…), so make sure you seek professional advice as you formulate your strategy.



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