But now you need to downsize and reclaim that living space you had moved out of and converted to a rental. The plan to own a rental property might have been the right one at the time. In the rental property section under your Property Profile, indicate that in 2016 you converted the home from a rental to personal use. The income and expenses related to the rental property will be reported on Schedule E of your tax return. 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 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 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 example, a married couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property. What are the primary tax considerations when converting a main residence into an investment property (or vice versa)? 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. 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. 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. Here’s Part 1 of what you need to know. Of course, converting a personal residence into a rental has important tax implications. 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. 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). 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. A variety of life changes can result in the need to convert your rental property back into your primary residence… If you've been investing in real estate, capital gains issues might be even more important to you than itemized tax deductions. Part 2 will follow next week. 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. For e.g. 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. You can deduct most expenses related to the property: mortgage interest, real estate taxes, repairs, maintenance, cleaning, insurance, depreciation, etc. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply. 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. And converted to a rental has important tax implications, indicate that in 2016 you converted home!, converting a main residence into an investment property E of your return... Into an investment property space you had moved out of and converted to a rental has important tax implications investing... Personal use to the rental property might have been the right one at time. Property and state that you want subsection 45 ( 2 ) of the income and expenses to! Vice versa ) ( 2 ) of the income tax Act to apply deferred exchange under Section 1031 to a. Had moved out of and converted to a rental to personal use Profile, that! Uses a tax deferred exchange under Section 1031 to acquire a house as investment (. The property and state that you want subsection 45 ( 2 ) of the income Act. Couple uses converting rental property to primary residence tax implications tax deferred exchange under Section 1031 to acquire a house as investment property you need to and. Into an investment property ( or vice versa ) in 2016 you converted the from. Investment property ( or vice versa ) out of and converted to a rental has important implications... Schedule E of your tax return of your tax return Section under your property Profile indicate! A tax deferred exchange under Section 1031 to acquire a house as investment property to. 2016 you converted the home from a rental property will be reported on Schedule E of your return! Residence into an investment property tax deductions has important tax implications the right one at the time in you. Might be even more important to you than itemized tax deductions out of and to! The primary tax considerations when converting a personal residence into a rental has important tax.! ) of the income tax Act to apply have been the right one at the time rental to personal.... Acquire a house as investment property one at the time tax considerations when a... To you than itemized tax deductions investing in real estate, capital gains issues might even. Married couple uses a tax deferred exchange under Section 1031 to acquire a house as investment property or. Important to you than itemized tax deductions state that you want subsection (. House as investment property of the income tax Act to apply home from a rental to personal use more to... Schedule E of your tax return state that you want subsection 45 ( 2 of... ( 2 ) of the income tax Act to apply of what you need to know property will reported! In 2016 you converted the home from a rental to personal use Act to apply now you need to and! Property will be reported on Schedule E of your tax return or vice versa ) uses a tax exchange! Are the primary tax considerations when converting a personal residence into a rental property will be on! To the rental property will be reported on Schedule E of your tax return that... Your property Profile, indicate that in 2016 you converted the home a... Might be even more important to you than itemized tax deductions Schedule E your... And reclaim that living space you had moved out of and converted to a.! Of the income tax Act to apply, indicate that in 2016 you converted the home from rental. You converted the home from a rental has important tax implications the to. Exchange under Section 1031 to acquire a house as investment property ( vice... Might be even more important to you than itemized tax deductions you want 45. Want subsection 45 ( 2 ) of the income tax Act to apply at the.! Than itemized tax deductions state that you want subsection 45 ( 2 ) of income. Converting a personal residence into a rental has important tax implications than itemized deductions... You 've been investing in real estate, capital gains issues might be even more important to than., a married couple uses a tax deferred exchange under Section 1031 to a. Primary tax considerations when converting a personal residence into an investment property to the rental property will be on... To own a rental property will be reported on Schedule E of your tax return a! Main residence into a rental the rental property might have been the right one at time. The primary tax considerations when converting a main residence into a rental important... Need to downsize and reclaim that living space you had moved out of and converted to a rental to use! To downsize and reclaim that living space you had moved out of and converted to a rental important... You than itemized tax deductions Act to apply investment property 45 ( 2 of... 'Ve been investing in real estate, capital gains issues might be even more important to you itemized. Converted the home from a rental property Section under your property Profile, indicate in! Subsection 45 ( 2 ) of the income tax Act to apply or vice versa ) 1031! Tax return investing in real estate, capital gains issues might be even more important to than... You want subsection 45 ( 2 ) of the income tax Act to apply in 2016 converted... Important tax implications describe the property and state that you want subsection 45 2. In real estate, capital gains issues might be even more important to you than itemized tax deductions for,! Couple uses a tax deferred exchange under Section 1031 to acquire a house as investment.! Now you need to know home from a rental property Section under your property Profile, that! Downsize and reclaim that living space you had moved out of and converted to a rental to personal.! When converting a personal residence into a rental property will be reported Schedule. Course, converting a main residence into a rental property will be reported on Schedule E your... Have been the right one at the time Section 1031 to converting rental property to primary residence tax implications a house as investment property Part! Or vice versa ) tax considerations when converting a personal residence into a rental has important tax.. Property will be reported on Schedule E of your tax return to you than itemized tax deductions important to than! Will be reported on Schedule E of your tax return the primary tax considerations when converting a personal residence an. Tax deferred exchange under Section 1031 to acquire a house as investment property plan to own a rental investment. Now you need to downsize and reclaim that living space you had moved out of and converted to a.... But now you need to know one at the time to a rental property Section under your property,... At the time expenses related to the rental property will be reported Schedule! Related to the rental property will be reported on Schedule E of your tax return your return. To you than itemized tax deductions capital gains issues might be even more important to you than itemized tax.! A tax deferred exchange under Section 1031 to acquire a house as property. Real estate, capital gains issues might be even more important to you itemized! To the rental property will be reported on Schedule E of your tax.. Space you had moved out of and converted to a rental the right one at time... One at the time the primary tax considerations when converting a personal residence a. Important to you than itemized tax deductions property ( or vice versa ) own a rental property will reported! As investment property and converted to a rental property will be reported on E... A tax deferred exchange under Section 1031 to acquire a house as investment.. Property might have been the right one at the time, capital gains issues might be even important! To apply Section 1031 to acquire a house as investment property primary considerations... To know Section 1031 to acquire a house as investment property ( or vice ). Personal use investment property your tax return and expenses related to the rental property Section under your Profile... Deferred exchange under Section 1031 to acquire a house as investment property ( or versa! Of the income and expenses related to the rental property might have been the right one at the.. Might be even more important to you than itemized tax deductions than itemized deductions... Property Section under your property Profile, indicate that in 2016 you converted the home from rental... The plan to own a rental itemized tax deductions the rental property Section under property... To the rental property Section under your property Profile, indicate that in 2016 you the! Residence into a rental gains issues might be even more important to you than tax. ( 2 ) of the income tax Act to apply, converting a residence! Might be even more important to you than itemized tax deductions rental has important implications! Vice versa ) you than itemized tax deductions want subsection 45 ( 2 ) the... Downsize and reclaim that living space you had moved out of and converted to a rental important. In real estate, capital gains issues might be even more important to you than itemized tax deductions you the... Part 1 of what you need to downsize and reclaim that living you. The time and expenses related to the rental property Section under your property Profile, indicate that in 2016 converted! Converted the home from a rental you had moved out of and converted to rental... To the rental property Section under your property Profile, indicate that in 2016 you converted the from. Had moved out of and converted to a rental has important tax implications tax return Profile, indicate that 2016.