Purchasing a new primary residence and renting out your old one

Tax, SDIRAs & Cost Segregation
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Purchasing a new primary residence and renting out your old one

Yasser Rodriguez
Rental Property Investor · Miami, FL · Member since 2022 · 10 posts · 5 votes

We are currently living in a primary residence that we closed on in May 2022 and moved into June 24th 2022.

Our primary home mortgage stipulates under occupancy clause: that we move into the house within 60 days of closing and occupy the residence for at least one year.

After that year, we were hoping on purchasing another primary residence closer to my

Job (30 miles away). We would love to rent out our current primary house as a long term rental.

Would we have to refinance if we fulfill that occupancy requirement? Also, in this scenario, could you quitclaim the property into an LLC?

Thoughts? Thank you - immensely grateful to the BP community.

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Chris McCormack
Accountant · Edina, MN · Member since 2020 · 172 posts · 97 votes
4y

Any time someone looks to employ this strategy I like to recommend a minor tax tip. Remember the IRS has a capital gain exclusion on the sale of your primary residence. To qualify, you have to live in the rental for 2 of the last 5 years. So if you plan on selling the house in the next 5 years you could benefit by staying in it for more than 1 year. You didn't mention anything about selling but always something to keep in mind.

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  • Joel Allen
    Rental Property Investor · San Antonio, TX (Lender in TX and SC) · Member since 2020 · 196 posts · 253 votes
    4y

    @Yasser Rodriguez

    Yes, that's a strategy I'm a fan of. It won't create explosive scaling opportunities, but it's a slow and steady approach. After fulfilling your occupancy requirement, you can convert the home into a rental and retain the existing mortgage. In terms of the LLC, that's a hot topic here on BP and if you search the Forums you'll see a wide variety of opinions. An umbrella insurance policy may be sufficient (vs. the LLC).

    You'll want to run your numbers and determine if your current home will perform well as rental.  Keep in mind as you run your numbers that some expenses change a bit when the home converts from a primary residence to a rental (examples:  may lose some property tax exemptions, homeowner's insurance policy vs. landlord insurance policy, etc).

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  • Yasser Rodriguez
    OP
    Rental Property Investor · Miami, FL · Member since 2022 · 10 posts · 5 votes
    4y

    @Joel Allen

    Thank you so much, Joel.

    I really appreciate you taking the time - I actually just got confirmation from the loan officer that echoes what you said.

    He did say that they can call the note if you quitclaim into an LLC - he said it's unlikely but possible.

    Given this, I agree with you - I may opt to carry a strong umbrella insurance for houses obtained in this manner.

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  • Chris McCormack
    Accountant · Edina, MN · Member since 2020 · 172 posts · 97 votes
    4y

    Any time someone looks to employ this strategy I like to recommend a minor tax tip. Remember the IRS has a capital gain exclusion on the sale of your primary residence. To qualify, you have to live in the rental for 2 of the last 5 years. So if you plan on selling the house in the next 5 years you could benefit by staying in it for more than 1 year. You didn't mention anything about selling but always something to keep in mind.

    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    4y

    @Yasser Rodriguez

    In general if you meet the residence requirement of at least a year you can keep your loan and potentially advantageous loan. If you live in it for at least two years you can rent it out for three more and still claim the primary residence exemption. If you decide to rent it out for longer or live in it for less than two years you can do a 1031 and defer all tax and depreciation capture when you do decide to sell the property!

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  • Yasser Rodriguez
    OP
    Rental Property Investor · Miami, FL · Member since 2022 · 10 posts · 5 votes
    4y

    @Chris McCormack

    Great point, Chris. I really appreciate this community

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  • Yasser Rodriguez
    OP
    Rental Property Investor · Miami, FL · Member since 2022 · 10 posts · 5 votes
    4y

    @Dave Foster

    Thanks Dave, appreciate your insight

    1Reply
  • Ryan Shannon
    Rental Property Investor · Savannah, GA · Member since 2019 · 47 posts · 16 votes
    4y

    The whole primary residence concept has always been curious to me.  How likely is it that his bank calls after 59 days and says "hey just making sure you moved into that house".  That has never happened to me.  Also, I know people who have intended to move into the home but things happen sometimes which may stop them from doing so.  I doubt any bank will make you find funding elsewhere or force you to refi, although I guess its technically possible.  Thoughts?

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