Converting a primary residence into an investment property can be a smart financial move, allowing homeowners to generate rental income while building equity. However, there are important steps and tax implications to consider when making the switch. This comprehensive guide outlines the key factors involved in converting a primary home into an investment property.
Determine if converting is financially viable based on rental income potential
The first step is to objectively evaluate whether converting makes financial sense based on the potential rental income in your area. Research market rents for comparable properties nearby to estimate your likely rental income. Factor in additional expenses like property management, maintenance and vacancies. Run the numbers to see if the expected net rental income exceeds your costs.
Consult with a lender about financing options before and after conversion
Meet with your mortgage lender before making the switch to understand available financing options, both for the new investment property and your next primary residence. You may need to qualify for a new investment loan at a higher rate. Refinancing the existing mortgage can help consolidate debts and tap home equity to fund the next home purchase.
Understand the tax implications – capital gains, depreciation, home office deductions
Converting a primary home to a rental triggers capital gains taxes, so consult a tax professional. You’ll now be able to claim depreciation deductions on the property. If you use part of the home as a home office for managing the rental, you may qualify for home office expense deductions as well. Keep detailed rental records.
Change property insurance to a landlord policy with liability coverage
A standard homeowner’s insurance policy won’t cover liabilities associated with renters. So switch to a special landlord policy that includes liability coverage for injuries, damage, theft and lawsuits related to tenants. Review policy limits and exclusions closely.
Treat the property consistently as a business asset rather than primary home
To qualify for tax benefits, you must consistently treat the property as a business asset rather than a primary home after converting it to a rental. That means tracking all income and expenses, keeping business records, and not claiming primary residence deductions. Consult a tax pro for guidance.
Converting a primary home into an investment property can generate rental income but involves key steps like evaluating finances, adjusting insurance, understanding taxes, and consistently operating it as a business asset.