Renting Out Current Primary Residence — How?

7 Replies

We are considering moving to a new home and renting out our current home. My question is how this works—I am thinking we would transfer title to an LLC, but do we have to notify the lender? Can we just keep making the mortgage payments? Do we need to refinance with the LLC? We have an FHA loan. Thanks for any advice.

Just another clarification—we’ve lived in our primary residence for 9 years.

i WOULD NOT change title. If you sell it, and  if you lived there 2 of the last five years, you can sell tax exempt. Some restrictions apply.

Find tenants and move out. It's really no more complicated than that. You've lived there for 9 years so you are not going to have a problem with your mortgage company.

@Alex Ewing

I assume(or at least hope) that your home appreciated over the 9 years that you owned your home. I suppose this will depend if you purchased it before or after the real estate bubble.

With that said - you may want to look into taking advantage of section 121 will allows you to exclude up-to $250,000/$500,000 of gain from the sale of your personal residence.

Thanks for the feedback!

You don't need to sell now in order to take advantage of the personal residence exclusion.  HOWEVER, you need to keep your eye on the clock!  You can rent your place out for 2 years, and then evaluate.  If your market is hot enough to sell quickly, then you may be able to get another small 6 month lease out of it before you put it up for sale.  But make sure you time this appropriately.  You only have 3 years EXACTLY to have disposed of the property before you would lose the exclusion.  Then you would be looking at a 1031 tax deferred exchange instead.

Regarding your mortgage, you don't need to alert your lender, except to send them a change of address for billing/notices.  You have already fulfilled your 12 month occupancy requirement with the 9 years you have lived there, so you don't owe them anything more.

You have just discovered a great way of acquiring rentals with minimal investment!  Buying owner occupied, living in it, and then converting to rental is a great way to build your portfolio without having to come up with 20% down every time.

@Alex Ewing , Nailed by @Cara Lonsdale .  As long as you sell so that you have still lived in the property for 2 out of the 5 years prior to the sale then you will still be able to take the tax free primary residence exemption.  If you are over the $250K/$500K limits of tax free then it gets even better because you still get the tax free exclusion and can 1031 exchange the remainder tax deferred.

One caveat - If you rent out and then sell even though you will get the gain tax free you will have to recapture depreciation for the time it was a rental.  The 1031 side of it will defer depreciation as well.

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