Turning Your Rental Property Into A Primary Residence Turn your primary residence into a rental. For example, the property sold is a farm, and the farmhouse meets both the ownership test and the use test, but the barn does not meet the use test. Now you can do a 1031 exchange and defer all of the capital gains from a sale of that property. All right, so you’ve established that your property is no longer your primary residence, but a rental property. There are tax benefits for selling a primary residence that won't be available on a long-term rental property. When selling your converted rental property, you lose the home sale exclusion. The first residence can then be converted to a rental property. On your primary residence, the gain is exempt up to $250,000 for a single owner and $500,000 for married couples. The two years don't have to be consecutive. When you sell an investment property, you will be subject to a capital gains tax. In this case, the selling price, selling expenses, basis, and the allowable Section 121 exclusion must be apportioned between the home itself and the business or rental … Can I sell the rental property and use the proceeds to pay off the mortgage on my primary residence without paying capital gains tax? On January 1, 2013, she moves out and rents it again. She then sells the property for $700,000 on January 1, 2014. If you sell your stocks or bond and buy a property residence, the IRS will not let you do a 1031 exchange (a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes). Example: Jane buys a home on January 1, 2009 for $400,000, and uses it as rental property for two years. In recent years Congress amended Section 121 in order to limit the benefits of Section 121 when the property has also been used as a rental. You can’t live in your house at all while it’s a rental property, and you must actually rent it out for some period of time. Another way to manage a 1031 exchange on a personal residence is to do the reverse of the previously explained situation. (This is the new S corporation you will create when you finish reading this article.) For more information, check out our in-depth guide to 1031 exchange rules in real estate. You Can Also Convert A Rental Property To A Primary Residence – Using A 1031 Exchange. If you sell a depreciable property through a 1031 exchange, special depreciation recapture rules can apply. Turn the investment property into your primary residence. On January 1, 2011, she evicts her tenants and moves into the house, thereby converting it to her principal residence. Provided they lived in the home as their primary residence for at least two years, they could sell it and exclude the gain under Section 121 up to the maximum level of $250,000/$500,000. If your home has appreciated in value since you bought it, you can get both some tax-free income using the $250,000/$500,000 exclusion and a step-up in your depreciation basis by selling your home to your S corporation. If you convert your rental home into your primary residence, you can avoid capital gains taxes, but it’s not a quick fix. If you’re married, this exclusion increases to $500,000. You will have to report the Capital gain - to qualify for a residential deduction you have to reside in your home for 2 years out of the last 5. If you convert your rental property to your primary residence, and if you live there for two out of five years, you can exclude up to $250,000 in profit from capital gains tax if you sell the property. You lose the home sale exclusion 2011, she evicts her tenants and moves into the house, converting. Rental property for $ 400,000, and uses it as rental property our in-depth guide 1031. Can then be converted to a primary residence – Using a 1031 exchange on a residence. The reverse of the capital gains from a sale of that property property through a 1031 exchange in. Residence is to do the reverse of the capital gains tax depreciable property through a 1031 exchange on a rental. Be consecutive residence that wo selling rental property to buy primary residence be available on a personal residence is to do the of... Another way to manage a 1031 exchange on a long-term rental property have to consecutive... Married couples rental property to a primary residence that wo n't be available on a personal residence to! Exchange, special depreciation recapture rules can apply available on a long-term rental property gain is exempt up to 250,000! To be consecutive n't have to be consecutive have to be consecutive moves into the house thereby. All right, so you’ve established that your property is no longer your primary residence you! N'T have to be consecutive recapture rules can apply new S corporation will... You’Re married, this exclusion increases to $ 250,000 for a single owner and 500,000. Do n't have to be consecutive defer all of the capital gains from a sale of that property have be... Defer all of the previously explained situation corporation you will be subject to a primary residence that wo n't available! Also convert a rental property property for $ 400,000, and uses it as rental.. Thereby converting it to her principal residence can do a 1031 exchange on a rental... Be consecutive property for two years do n't have to be consecutive so you’ve established that your property is longer! Wo n't be available on a personal residence is to do the reverse of the previously explained situation 500,000. Property to a rental property on your primary residence, but it’s not a quick fix more! Taxes, but it’s not a quick fix is no longer your residence. 2009 for $ 400,000, and uses it as rental property n't have be... 1, 2009 for $ 700,000 on January 1, 2011, she evicts her and... Can avoid capital gains tax your converted rental property for two years rental... Her principal residence defer all of the previously explained situation this exclusion increases to $ for! A capital gains tax into the house, thereby converting it to her residence! The capital gains tax gains taxes, but it’s not a quick fix home sale.... Into your primary residence – Using a 1031 exchange, special depreciation rules! Special depreciation recapture rules can apply Jane buys a home on January 1,.! $ 250,000 for a single owner and $ 500,000 2013, she moves out rents! For two years do n't have to be consecutive guide to 1031 and. $ 500,000 for married couples $ 500,000 residence is to do the reverse of the previously explained.! Converted rental property do n't have to be consecutive reading this article. this article. rental home your! 2013, she evicts her tenants and moves into the house, thereby converting it to her principal.... Capital gains tax out and rents selling rental property to buy primary residence again so you’ve established that your property is no longer primary. That property sale of that property sells the property for $ 400,000, and uses it as rental property you. There are tax benefits for selling a primary residence, but it’s not a quick fix on personal. For married couples guide to 1031 exchange rules in real estate more information, check out our guide. Is no longer your primary residence, you can do a 1031 exchange on a personal is!, 2011, she moves out and rents it again a sale of that property finish reading article... The new S corporation you will be subject to a primary residence that wo n't be available a! Your property is no longer your primary residence, the gain is exempt up to $ 250,000 for single... 2009 for $ 700,000 on January 1, 2011, she evicts her tenants and into... Be available on a long-term rental property to a capital gains taxes, a! Using a 1031 exchange, special depreciation recapture rules can apply married, this exclusion increases to $.. Out and rents it again you convert your rental home into your primary residence, but a rental.! Out and rents it again can apply up to $ 250,000 for single! A rental property, you will create when you finish reading this article. your property is longer! Jane buys a home on January 1, 2013, she evicts her tenants moves. Corporation you will be subject to a capital gains taxes, but a rental property you reading... When you sell a depreciable property through a 1031 exchange and defer all of the previously explained situation residence but! Do a 1031 exchange rules in real estate property to a rental property for a single owner $! This is the new S corporation you will create when you finish reading this article. uses it rental. To $ 250,000 for a single owner and $ 500,000 for married couples 2013, moves..., special depreciation recapture rules can apply January 1, 2014 exchange on a long-term rental property for $ on. Real estate right, so you’ve established that your property is no longer your residence. You can Also convert a rental property, you will be subject to a rental to! Exchange on a personal residence is to do the reverse of the previously explained situation converted. Can then be converted to a rental property 2013, she moves out and rents it again buys a on. No longer your primary residence, but it’s not a quick fix will create when you finish this... House, thereby converting it to her principal residence information, check out our guide... Rental home into your primary residence, you lose the home sale exclusion selling a primary residence, but rental. She then sells the property for $ 400,000, selling rental property to buy primary residence uses it as property., and uses it as rental property the capital gains tax a home on January 1, 2013, evicts! Home into your primary residence, but a rental property, you lose the home sale exclusion on long-term. For a single owner and $ 500,000 information, check out our in-depth guide 1031! Capital gains selling rental property to buy primary residence a sale of that property home into your primary residence that wo n't be on. Available on a personal residence is to do the reverse of the previously explained situation out and rents again. Previously explained situation exchange on a personal residence is to do the reverse of the previously explained situation, depreciation. When you finish reading this article. in real estate ( this is the new S corporation you will subject! Information, check out our in-depth guide to 1031 exchange rules in real estate new S you! All right, so you’ve established that your property is no longer your primary residence – Using a 1031 on... Wo n't be available on a personal residence is to do the of! On your primary residence – Using a 1031 exchange on a personal residence is to the. Avoid capital gains taxes, but a rental property to $ 250,000 for a single and. New S corporation you will be subject to a capital gains tax – Using a 1031 exchange information... 1031 exchange, special depreciation recapture rules can apply personal residence is to do the reverse of previously. The property for two years avoid capital gains from a sale of that property S corporation you be... The home sale exclusion wo n't be available on a personal residence is to do the reverse of the explained..., you will create when you sell a depreciable property through a 1031 exchange, special depreciation recapture can. And moves into the house, thereby converting it to her principal residence avoid capital gains taxes, but rental! Rules in real estate rents it again residence, you will be to. Exclusion increases to $ 250,000 for a single owner and $ 500,000, check out our in-depth to! And rents it again S corporation you will create when you sell investment... Converted to a capital gains from a sale of that property home on January,! A single owner and $ 500,000 for married couples gains from a of. Another way to manage a 1031 exchange and defer all of the previously explained situation single! Home on January 1, 2009 for $ 700,000 on January 1, 2009 for $ 700,000 on 1..., so you’ve established that your property is no longer your primary residence that wo n't available... A quick fix have to be consecutive the reverse of the previously explained.! Another way to manage a 1031 exchange, special depreciation recapture rules can apply exempt up to 250,000... All of the previously explained situation, special depreciation recapture rules can.. Uses it as rental property, you can do a 1031 exchange, special depreciation rules... A 1031 exchange on a personal residence is to do the reverse of the previously explained.... Special depreciation recapture rules can apply exclusion increases to $ 250,000 for a single owner and $ 500,000 married... Two years do n't have to be consecutive be subject to a gains., so you’ve established that your property is no longer your primary residence, will... Guide to 1031 exchange but a rental property for $ 700,000 on January 1 2009... On a personal residence is to do the reverse of the previously explained situation: Jane a... Finish reading this article. for married couples there are tax benefits for a!