Converting House Hacked Primary Residence into Rental

[Will Lee]

Hi Bigger Pockets family!  

Thank you all for any input in advance as I have been soaking up information these past few months. 

I have house hacked my primary home in Orange County, California for the last 5 years.  I recently got married, and we are planning on transitioning to live in my Wife's house.  My property is still considered my primary on paper right now since my marriage is so recent. 

Question:  What is my best strategy to move forward in this situation?  

1. Do I continue to keep my property as a primary residence and just "house hack" it as a rental? 

2.  Is there some transition where my property now becomes considered a fully "rental/investment property" as opposed to a live in primary? 

3. If I transition to out of my primary and convert it to a "rental/investment property", the concern is now if I sell it, I lose out on the tax savings (I think up to 200k  cap gain?)  for selling a primary live in property, as opposed to as a "rental/invst prop" which I only have the option to 1031 in order to save tax. 

Hope my question makes sense.  Not sure if I even have an option as I'm assuming I have to convert my primary residence into an investment since I'm moving in with my wife in her house. 

Thanks again!

Will

[Dave Foster]

@Will Lee, You got it.  You have some time to decide a long term strategy.  As long as you can still document that you have lived in that property for 2 out of the 5 years immediately prior to sale you will be able to take the first $250K in gain tax free.  

If you move out and then rent it, that in effect converts it to a rental and your accountant will set up a depreciation schedule.  When you sell the house later, even if during that 3 year period when you can still claim the primary exemption you will still have to recapture depreciation.

If you decide to continue to rent the property past the 3 year mark you can always take advantage of a 1031 exchange when you sell and defer the tax.  But of course that's not quite as nice as tax free!

But for right now you do have the cushion of that three years to evaluate whether it is a good rental or whether you should take out the tax free income now.