Tax Implication Converting Primary Residence to Rental

[Justin Owens]

I'm in the process of purchasing a new primary residence.  I have owned and lived in my current home for 13 years.  I am considering keeping my current home and renting it out.  What are the tax implications if I do this?  If I sell it now, I will not have any tax liability but does renting it out change that in the future if I were to sell?  How would taking depreciation while renting it affect an eventual sale down the road?

[Natalie Kolodij]

You will still be able to sell the home and receive the 121 exclusion if the home is rented for no more than 3 years. That would still allow you to meet the 2/5 year rule. 

When you do sell; you will have to pay back the depreciation that is taken during those 3 years. 

If you rent longer than 3 years the sale will be totally taxable like a sale of a normal rental. 

When you set up the former primary home as a rental the amount you get to utilize for your basis is going to be the lower of what you paid, or it's value on that date it's made a rental. 

You can also depreciate any renovations you did to the property as well. 

The 121 exclusion actually comes down to the specific date. So you'll want to carefully track the dates for last occupied and when the 365* 3 date is from then.