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How to Convert Your Residence Into an Investment Property

Did you know that you can convert your residence into an investment property and access tax benefits?

It is true. When you convert your primary residence into a rental property, you can tap into a few sections of the IRS code that helps to defer your taxes. Let’s look at a small 3-unit multi-family property and a single-family house as examples to explore how this is possible.

Multi-family property

Let’s set up the scenario. You decide to buy a triplex (3-unit property) where you are living in one unit and renting the other two units out:

  • One primary residence unit – use a Section 121 to convert to a 1031 rental unit
  • Two rental units – use a Section 1031

You have to treat them differently because two of the three units are a “business.”

Single-family property

Now let’s take a look at a single-family home. This is just one household.

  1. Use Section 121 to convert primary residence to a Section 1031
  2. Conduct a Section 1031 tax-deferred exchange to relinquish the single-family house and replace it with another like-kind property used for investment purposes.

Now, most importantly, you need to take into consideration the rules relevant to this:

  • You must live in the primary residence for at least two of the last five years before converting
  • Can exclude up to $250,000 in capital gains if filing single and up to $500,000 in capital gains if filing jointly
  • Section 121 may only be conducted once every two years

We hope that understanding the tax code helps you understand not only the options you have but inspires exploration of what may work for you and your investing plans. There are several ways to take advantage of these great opportunities; if you do it correctly, you can turn one investment into another. We’d love to help you in your endeavors, so please connect with one of our real estate professionals to help guide you the rest of the way.

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