Appreciate if someone can help give guidance on our situation. We will seek CPA guidance before we actually commit. 

We currently own a single family home in Orange County. It is too big for our needs and we are on with moving into a smaller and much cheaper rental to save us about a thousand a month. Are the tax benefits for living in our primary residence similar to the tax benefits of using it as a rental? Id hate to save money on moving into the rental just to hurt us on the tax side. 

@Josef Torkelsen  I'm no CPA so make sure to consult one before you commit.  It sounds like you are planning to rent your single family home and move into a rental?

In addition to the tax benefits for using as a primary home (interest, property tax write offs) you will also be able to write off things such as insurance, management fees, or anything else related to converting it into a rental.   One of your best tools will be depreciating your property since it is now considered a depreciable asset.  There are many topics here on BP and books written on the subject.

I'll also offer the disclaimer that I'm not a CPA.  That said, I did this very thing several years ago with my primary residence.  The second you move out of your primary residence and rent it out, it becomes an "investment property".  As Matt said, your tax advantages actually increase, exponentially, with an investment property.  Good luck

@Josef Torkelsen  It's difficult to discern exactly what you are meaning (i.e. are you selling your primary residence then moving into a rental or renting your primary residence then moving into a rental?). 

If you convert your primary residence, tax benefits will likely increase, but your investment will perform poorly if you are only in it for the tax benefits. A smarter question would have been: "I'm considering moving out of my primary residence, I have X amount of equity in the house, I can rent it for X amount, and I'll be moving into a rental myself for X amount, is this a good idea?"

Regardless, if you convert your primary to a rental, devise an exit strategy if your primary residence has seen a large amount of appreciation. If you sell within the next three years, you can shelter the gains and avoid paying taxes on it. 

Originally posted by @Josef Torkelsen :

Appreciate if someone can help give guidance on our situation. We will seek CPA guidance before we actually commit. 

We currently own a single family home in Orange County. It is too big for our needs and we are on with moving into a smaller and much cheaper rental to save us about a thousand a month. Are the tax benefits for living in our primary residence similar to the tax benefits of using it as a rental? Id hate to save money on moving into the rental just to hurt us on the tax side. 

What are you current deductible housing expenses?  

What do your non-housing itemized deductions add up to?

What would the value be for the structure of your house(this depreciates which defers taxes)?  Can you deduct passive losses?

In a high equity situation/low itemized deduction scenario you could be generating a lot of tax deferred income towards principal and your rent.

If the house was bought for 500K with 400K towards the structure and you have 14.5K for taxes and interest per year.  Assume you pay down 6K/year in principal.  On a net rent of 30K/year you end up getting 8.5K in cash and 6K in principal deduction that is tax deferred.  If your housing costs are most of your itemized deductions you could only be getting 5 or 6K in net deductions.  One difference is owner occupied is a deduction rather than a deferral.

If you are in a lower equity situation and your deductible housing expenses are 24K and you are paying down 6K in principal per year, you will have an income deferral of 14.5K vs. a minimum deduction of 12K as owner-occupied.  Your federal tax bill(at 25%) will increase by a minimum of 1,500 but your housing expenses are 12,000 less per year.

Unless the rental makes money, really what you are doing is an appreciation play.  You basically are betting that your appreciation will exceed your repairs/capital expenses and

the appreciation on a smaller place purchased either as a rental or for your primary residence.

I did something similar, although I bought my current primary residence.  My tax situation is such that I can't use the "paper loss" to do a tax deferral so I am selling my former primary residence.  It would have been advantageous to do so within 3 years anyway(500K exclusion).

My plan is to buy a rental with mostly cash that will generate income that will be mostly tax-deferred.

Why would you give up your 250/500 thousand exclusion for primary home owners If you lived in your home 2 out of 5 years you can sell it tax free up to the numbers i posted Once you convert your home into a rental property you  loose those exclusions check with your cpa

@Josef Torkelsen I think that @Steven Picker answered your question best.  I know of a great CPA, that I work with, that would be able to answer your question.  PM me and I can send you her contact information.

Don't just throw away your most powerful tax advantaged tool by converting it to a rental.  A better plan would be to sell the home and then take that NONE taxed cash and start investing in rentals if you wish.

Good luck to you.

@Steven Picker   What you said is not true. Converting your primary residence into a rental property does not exclude you from taking the section 121 capital gains exclusion. As long as you occupy the home as your primary residence for two out of the previous five years, you can shelter capital gains of up to $250k if single, $500k if married filing jointly. 

Additionally, you imply that Josef is making a poor decision yet he hasn't furnished any information to us, so can you please explain as to what information you are basing your assumptions?

@joe homs - if that's the advice you received from your CPA, I'd suggest getting a new one.

Appreciate everyone taking the time to respond to the initial post. I wanted to give a little more context in case it changes what people are thinking about the situation. I've also tried to do a little more research as well.

We currently own a single family residence in California and are thinking about renting it out for about breakeven and then save money by moving into someone else's smaller/cheaper rental to save about $1200 a month. We do foresee moving back into the property at some future point and living in it for at least 2 years so the tax benefit of selling it now to shield the gains is not a concern for us.

We am concerned that because of our AGI and correspondingly high tax rate, that we will lose our homeowner's mortgage interest deduction which offsets our active income currently. Although making the property a rental property will technically allow us to write off even more of our expenses, unless one of us is a real estate professional, the best I believe we can do is to defer our losses to future years. If I understand this correctly, then it would be more harmful for us to perform the above strategy due to the negative tax implications. Secondly, if one of us is a real estate professional (which my wife is considering doing), then it would be beneficial to perform the above. Any thoughts on this? Do I understand the implications correctly?

Details in case it gives more context:

• Home purchase price: $510,000
• Fair market value as of today: $675,000
• Currently have a 30 year mortage at 3.25% interest rate.
• Owe about $440,000 on the loan.
• Mortgage ~$2350 which includes taxes and insurance.
• Rent ~$2650 - 2750
• Currently AGI ~$180,000
• Foresee active income going down significantly in about 2 years
• Typically itemize deductions because of mortgage interest
• Currently buying two small apartment buildings out of state as well (29 unit and 16 unit) for about a $40,000 cash flow a year

Greetings @Josef Torkelsen hope all is well, wanted to learn how your strategy turned out since this thread posted a year ago. - Thanks