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What is the difference between a personal residence and an investment property?
A personal residence is a property where you live, while an investment property is purchased with the intent of generating rental income or capital appreciation.
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Why would I want to convert my personal residence into an investment property?
Converting to an investment property can allow you to generate rental income, take advantage of tax benefits, and potentially participate in a IRC Section 1031 exchange for tax deferral.
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Do I need to notify anyone when converting my personal residence into an investment property?
Yes, you should inform your tax advisor, mortgage lender, insurance company, and review HOA and local zoning rules to ensure compliance with rental regulations.
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What are the tax implications of converting my residence into an investment property?
You may lose certain tax benefits like the IRC Section 121 primary residence capital gains exclusion, but you can gain tax advantages through rental deductions and a 1031 exchange. Considerations have to be given to changes that could lead to property tax revaluations.
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How long should I hold the property as an investment before considering a 1031 exchange?
Typically, it’s recommended to hold the property as an investment for at least one to two years before conducting a 1031 exchange.
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What is a 1031 exchange, and how does it benefit me?
A 1031 exchange allows you to defer capital gains taxes when selling an investment property and reinvesting the proceeds in another investment property, preserving your equity.
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Can I convert my personal residence back into a primary residence after it’s been an investment property?
Yes, you can and potentially regain the tax benefits afforded to the sale of a personal residence
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Can I use Section 121 (gain exclusion) and a 1031 exchange together?
Yes, you may be able to use both Section 121 and a 1031 exchange, but it requires careful planning and compliance with tax rules.
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What happens to the property if I pass away after converting it into an investment property?
Any changes to significant assets of your estates should be evaluated, but converting residences to investment property can be a beneficial estate planning strategy when done properly.
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What steps should I take to before converting my personal residence into an investment property?
It’s highly advisable to consult with a tax and real estate professional to navigate the process successfully. All situations contain facts and circumstances that require a detailed review with your tax advisor