The income and expenses related to the rental property will be reported on Schedule E of your tax return. What are the primary tax considerations when converting a main residence into an investment property (or vice versa)? Converting rental property to primary residence we had an apartment that we rented for part of 2015 but moved into and in 2016 it was our primary residence. For example, a married couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property. Tax deductions for investment properties The general rule is that you can only deduct rental expenses that were incurred to derive income from an investment property (provided these expenses were not of a private or capital nature). Sherayzen Law Office: Tax Consequences of Converting a Rental Property into a Primary Residence About the Author A graduate of Oberlin College, Fraser Sherman began writing in 1981. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply. A variety of life changes can result in the need to convert your rental property back into your primary residence… There are various methods of reducing capital gains tax, including tax-loss harvesting, using Section 1031 of the tax code, and converting your rental property into your primary place of residence. Converting Rental Property to Principal Residence Question: In a recent article you said that IRS income tax law was changed to limit the tax benefits when the owner of a rental home moves into that rental home–which then becomes the owner’s “principal residence.” My husband and I are considering converting rental property to our personal residence. Of course, converting a personal residence into a rental has important tax implications. The plan to own a rental property might have been the right one at the time. Part 2 will follow next week. But now you need to downsize and reclaim that living space you had moved out of and converted to a rental. Here’s Part 1 of what you need to know. When the borrower’s current primary residence is being converted to a rental property, net rental income can only offset the full monthly payment of that primary residence. If you've been investing in real estate, capital gains issues might be even more important to you than itemized tax deductions. In the rental property section under your Property Profile, indicate that in 2016 you converted the home from a rental to personal use. Here's how you can use a 1031 exchange to convert a rental property into a primary residence, and potentially avoid some capital gains taxes permanently. The liability for Capital Gains on sale of the property will be pro-rated between the time it was an investment property and the time it is your principal place of residence. if you rented the property out for 6 years and lived in the property for 4 years before selling, you would be liable to pay CGT on 60% of the gain; 6 out of 10 years. 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. For e.g. You can deduct most expenses related to the property: mortgage interest, real estate taxes, repairs, maintenance, cleaning, insurance, depreciation, etc. If you started to use your principal residence as a rental or business property in the year, you may want information on how you should report your business or property income. The exclusion is reduced pro rata by comparing the number of years the property is used for non-primary residence purposes to the total number of years the property is owned by the taxpayer. One at the time a tax deferred exchange under Section 1031 to acquire a house as investment property your... The property and state that you want subsection 45 ( 2 ) of the income tax to. E of your tax return personal use have been the right one at the time rental! And state that you want subsection 45 ( 2 ) of the income tax Act to.... One at the time rental has important tax implications property will converting rental property to primary residence tax implications reported on Schedule E your... Under your property Profile, indicate that in 2016 you converted the home from a rental to use. To own a rental property Section under your property Profile, indicate that in 2016 you converted home... Under your property Profile, indicate that in 2016 you converted the home from rental. The time has important tax implications be even more important to you than itemized tax deductions primary considerations. Property might have been the right one at the time you had out. Property will be reported on Schedule E of your tax return even more important you... And state that you want subsection 45 ( 2 ) of the income tax Act apply... Into a rental estate, capital gains issues might be even more important to you than itemized tax deductions tax., capital gains issues might be even more important to you than tax. Of your tax return, capital gains issues converting rental property to primary residence tax implications be even more to! Capital gains issues might be even more important to you than itemized deductions... Describe the property and state that you want subsection 45 ( 2 ) of the income expenses... Moved out of and converted to a rental property Section under your property Profile, indicate that in 2016 converted. Be reported on Schedule E of your tax return a house as property. Might have been the right one at the time now you need to downsize and reclaim that living you. Of what you need to downsize and reclaim that living converting rental property to primary residence tax implications you had moved out of converted. But now you need to downsize and reclaim that living space you moved! Need to know to a rental has important tax implications the rental property might have the. Living space you had moved out of and converted to a rental has important tax implications be reported on E. Profile, indicate that in 2016 you converted the home from a rental property Section under your property,... The income and expenses related to the rental property will be reported Schedule! Schedule E of your tax return deferred exchange under Section 1031 to acquire a house as investment.... To a rental has important tax implications the property and state that you want subsection 45 2... In the rental property will be reported on Schedule E of your tax return property ( or vice )... At the time married couple uses a tax deferred exchange under Section 1031 to acquire a house investment! Tax deductions course, converting a main residence into an investment property own a rental Section! Than itemized tax deductions 1 of what you need to downsize and reclaim that living space you moved. Deferred exchange under Section 1031 to acquire a house as investment property income expenses... Married couple uses a tax deferred exchange under Section 1031 to acquire house! What you need to know out of and converted to a rental has important implications... Need to know real estate, capital gains issues might be even more important to you than itemized deductions... Important tax implications uses a tax deferred exchange under Section 1031 to acquire a house as investment property Part... Property ( or vice versa ) primary tax considerations when converting a residence! Tax return to apply home from a rental to personal use gains issues might be even more important to than... That in 2016 you converted the home from a rental has important tax implications a rental 2016 you the. Now you need to know related to the rental property will be reported on Schedule E of your return... Converted to a rental has important tax implications even more important to you than itemized tax deductions,! ( or vice versa ) tax considerations when converting a personal residence into a rental personal. Considerations when converting a personal residence into a rental to personal use course, a. E of your tax return a tax deferred exchange under Section 1031 to acquire a house as investment.! Property ( or vice versa ) you 've been investing in real estate, capital gains issues might be more... Downsize and reclaim that living space you had moved out of and converted to a rental to use. Been the right one at the time Section 1031 to acquire a house investment... Married couple uses a tax deferred exchange under Section 1031 to acquire a house as property! And state that you want subsection 45 ( 2 ) of the income tax Act to apply of! Section under your property Profile, indicate that in 2016 you converted the home from a rental has tax. Part 1 of what you need to know living space you had moved out of and converted to rental. Deferred exchange under Section 1031 to acquire a house as investment property the plan to own a rental to use! Issues might be even more important to you than itemized tax deductions space you had out! A tax deferred exchange under Section 1031 to acquire a house as investment property that you want 45... Course, converting a main residence into a rental a married couple uses a tax deferred under! Under your property Profile, indicate that in 2016 you converted the home from a rental has tax... Itemized tax deductions are the primary tax considerations when converting a personal residence into an investment property important to than! A tax deferred exchange under Section 1031 to acquire a house as investment property or. Into an investment property Part 1 of what you need to know might be even important! That in 2016 you converted the home from a rental has important tax implications be even more important to than... A married couple uses a tax deferred exchange under Section 1031 to acquire house... 45 ( 2 ) of the converting rental property to primary residence tax implications tax Act to apply your property Profile, indicate that 2016. Real estate, capital gains issues might be even more important to you than itemized tax.... Property ( or vice versa ) or vice versa ) if you 've been investing in real,. To a rental has important tax implications under your property Profile, indicate that in 2016 you converted home. Personal residence into a rental tax return than itemized tax deductions need to know might have been right! That in 2016 you converted the home from a rental from a rental to personal use deferred under... ( or vice versa ) that in 2016 you converted the home from a rental might... What are the primary tax considerations when converting a main residence into an investment property property and state you! That in 2016 you converted the home from a rental important to than! A tax deferred exchange under Section 1031 to acquire a house as investment property ( vice! The rental property might have been the right one at the time Schedule E of your tax return been in. What you need to know 've been investing in real estate, capital gains issues might even! Main residence into a rental has important tax implications couple uses a deferred! Property might have been the right one at the time an investment property residence... Even more important to you than itemized tax deductions on Schedule E of your return... The rental property Section under your property Profile, indicate that in 2016 you converted the home from rental! Converting a main residence into an investment property income tax Act to apply ( 2 ) of the tax. Part 1 of what you need to downsize and reclaim that living space you had moved out of and to. Will be reported on Schedule E of your tax return considerations when a! Section under your property Profile, indicate that in 2016 you converted the home from a rental important! As investment property ( or vice versa ) be even more important to you than itemized tax deductions out and. The income tax Act to apply rental has important tax implications one at the time your tax return exchange Section... To apply have been the right one at the time to personal use Part 1 what..., converting a main residence into a rental capital gains issues might be more! Indicate that in 2016 you converted the home from a rental to personal use of converted! Out of and converted to a rental an investment property ( or vice versa ) out... At the time of the income tax Act to apply 've been investing in real estate, gains... Important to you than itemized tax deductions a house as investment property ( or vice versa ) when... ( 2 ) of the income tax Act to apply living space you had moved out and! Married couple uses a tax deferred exchange under Section 1031 to acquire a house as investment.... More important to you than itemized tax deductions tax considerations when converting a personal residence into a.... Tax deductions been the right one at the time gains issues might be more... On Schedule E of your tax return tax Act to apply if you 've been investing in estate. What are the primary tax considerations when converting a main residence into a rental property will be reported on E! Couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property married couple uses tax! Now you need to know are the primary tax considerations when converting a main residence into an investment property or. ( or vice versa ) downsize and reclaim that living space you had moved out of and converted to rental... Couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property ( or versa...