Turn Your Rental Property into Your Primary Residence
- What It Is: Conversion of rental property into a primary residence
- Who It’s For: Anyone able to convert a rental property into their primary residence
- What You Get: The ability to exclude as much as $500,000 in capital gains from taxes
Selling a home you live in is more tax beneficial than unloading a rental property for a profit. IRS Section 121 allows people exclude up to $250,000 of the profits from the sale of their primary residence if they're single and up to $500,000 if they're married filing jointly. To qualify, investors must own their homes for at least five years and must have lived in them for at least two of those five years. The years as a personal residence do not have to be consecutive. For this reason, some investors choose to convert rental properties into their primary residences.4??
The deduction amount depends on how long the property was used as a rental versus its use as a primary residence. Additionally, a taxpayer may not exclude the portion of the gain that was previously attributable to a depreciation deduction. This is known as depreciation recapture, specific to rental properties, and the amount previously taken as a depreciation deduction is taxed at a recapture rate of 25%.5
