Converting an investment property into a primary residence can be a smart financial move for some homeowners. The key benefit is being able to tap into the equity that has built up in the property over time. This allows homeowners to access those funds for major expenses like home renovations, college tuition, or even retirement. However, there are also tax implications and other factors to consider before converting a rental property or vacation home into your permanent home. This article will explore the pros and cons, tax issues, and steps involved in converting investment property to primary residence.
Assess your financial situation and goals before converting investment property
The first step is to fully evaluate your overall financial picture, including assets, income sources, debts, and future plans. Look at your investment property in the context of your broader portfolio and financial goals. How much equity do you have tied up in it? What are your other assets? Will you still have a well-diversified portfolio after converting the property? Are there better ways to access equity, like refinancing? Do you still need the rental income? Be sure converting supports your long-term financial objectives.
Understand the tax impacts of changing investment property to primary residence
Converting a rental or vacation property to your primary residence can impact taxes in a few key ways. First, you may face capital gains taxes if you sell investment property that has appreciated significantly. However, the capital gains tax exclusion allows up to $250,000 profit tax-free for single filers and $500,000 for married couples filing jointly. Second, you lose the tax benefits of expenses and depreciation write-offs on investment properties. Third, your property taxes may increase as a primary residence. Consult a tax professional to model the implications.
Evaluate timing and renovation needs when switching investment property
The timing of a conversion can impact your tax situation, so model some what-if scenarios. Converting partway through the year may trigger partial-year reporting requirements. Also assess renovation needs to make the property suitable as your primary home. Budget for any upgrades to facilitate the transition. You don’t necessarily have to occupy the home immediately, but be sure to move in within a reasonable timeframe after identifying it as your new primary residence.
Follow proper procedures when changing over investment property
There are a few key procedural steps to execute a clean transition: Update insurance policies on the property to reflect owner-occupancy status. Review the mortgage and inform lenders if converting to primary residence. File updated tax forms like Schedule E and Schedule A reflecting the change. Document the use change thoroughly in case of any question down the road. Also develop a plan to replace the lost rental income if needed. Loop in your accountant, attorney, and mortgage broker to ensure you complete all required processes.
Converting an investment property into a primary residence allows homeowners to unlock equity and gain personal use of the property. But it also impacts taxes, income, and your overall portfolio, so careful analysis is required beforehand. Following proper procedures and timing the switch strategically can produce the best results. With the right planning, changing over real estate investments can be an effective financial move.