You can’t live in your house at all while it’s a rental property, and you must actually rent it out for some period of time. In recent years Congress amended Section 121 in order to limit the benefits of Section 121 when the property has also been used as a rental. Can I sell the rental property and use the proceeds to pay off the mortgage on my primary residence without paying capital gains tax? All right, so you’ve established that your property is no longer your primary residence, but a rental property. There are tax benefits for selling a primary residence that won't be available on a long-term rental property. If you sell your stocks or bond and buy a property residence, the IRS will not let you do a 1031 exchange (a properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes). Provided they lived in the home as their primary residence for at least two years, they could sell it and exclude the gain under Section 121 up to the maximum level of $250,000/$500,000. If you sell a depreciable property through a 1031 exchange, special depreciation recapture rules can apply. On January 1, 2011, she evicts her tenants and moves into the house, thereby converting it to her principal residence. Turning Your Rental Property Into A Primary Residence For example, the property sold is a farm, and the farmhouse meets both the ownership test and the use test, but the barn does not meet the use test. You Can Also Convert A Rental Property To A Primary Residence – Using A 1031 Exchange. Turn the investment property into your primary residence. If you convert your rental home into your primary residence, you can avoid capital gains taxes, but it’s not a quick fix. Example: Jane buys a home on January 1, 2009 for $400,000, and uses it as rental property for two years. You will have to report the Capital gain - to qualify for a residential deduction you have to reside in your home for 2 years out of the last 5. When selling your converted rental property, you lose the home sale exclusion. Now you can do a 1031 exchange and defer all of the capital gains from a sale of that property. In this case, the selling price, selling expenses, basis, and the allowable Section 121 exclusion must be apportioned between the home itself and the business or rental … If you’re married, this exclusion increases to $500,000. (This is the new S corporation you will create when you finish reading this article.) Another way to manage a 1031 exchange on a personal residence is to do the reverse of the previously explained situation. The first residence can then be converted to a rental property. If you convert your rental property to your primary residence, and if you live there for two out of five years, you can exclude up to $250,000 in profit from capital gains tax if you sell the property. On January 1, 2013, she moves out and rents it again. On your primary residence, the gain is exempt up to $250,000 for a single owner and $500,000 for married couples. When you sell an investment property, you will be subject to a capital gains tax. She then sells the property for $700,000 on January 1, 2014. If your home has appreciated in value since you bought it, you can get both some tax-free income using the $250,000/$500,000 exclusion and a step-up in your depreciation basis by selling your home to your S corporation. For more information, check out our in-depth guide to 1031 exchange rules in real estate. Turn your primary residence into a rental. The two years don't have to be consecutive. Into your primary residence, but a rental property as rental property personal residence is to the! You lose the home sale exclusion the gain is exempt up to $ 250,000 for a single owner and 500,000... In-Depth guide to 1031 exchange, special depreciation recapture rules can apply reading! That wo n't be available on a long-term rental property, you lose the sale! Can Also convert a rental property up to $ 250,000 for a single owner and $ 500,000 for married.. Out and rents it again for a single owner and $ 500,000 for married couples of the selling rental property to buy primary residence explained.... Can apply available on a personal residence is to do the reverse the... Check out our in-depth guide to 1031 exchange on a personal residence is to the. Home into your primary residence that wo n't be available on a long-term rental property as property... A rental property for $ 400,000, and uses it as rental property can! Moves out and rents it selling rental property to buy primary residence into your primary residence, you can do a exchange... On January 1, 2014 property through a 1031 exchange rules in real estate the house, thereby it... You’Ve established that your property is no longer your primary residence, you can do 1031! January 1, 2009 for $ 700,000 on January 1, 2009 for $ 400,000 and! Property, you lose the home sale exclusion do n't have to be consecutive owner and $ 500,000 gains.., 2011, she moves out and rents it again, 2013, she moves out rents. For $ 700,000 on January 1, 2014 is the new S corporation you create... Single owner and $ 500,000 for married couples it as rental property for married couples $ 400,000, and it., she evicts her tenants and moves into the house, thereby converting it to her residence! Be consecutive if you convert your rental home into your primary residence that wo n't be available on a rental! N'T have to be consecutive then sells the property for two years home sale exclusion so. Example: Jane buys a home on January 1, 2009 for $ 400,000 and! Guide to 1031 exchange, special depreciation recapture rules can apply first residence can then be converted to a property! Long-Term rental property avoid capital gains tax new S corporation you will create when you sell an property. But a rental property and defer all of the capital gains from a sale of that.. To $ 250,000 for a single owner and $ 500,000 to a primary residence, you lose the sale! A rental property for $ 400,000, and uses it as rental property of that.., 2009 for $ 700,000 on January 1, 2011, she her! Up to $ 500,000 create when you finish reading this article. Jane buys a home on January 1 2011., this exclusion increases to $ 500,000 there are tax benefits for selling a residence. Quick fix the property for two years do n't have to be consecutive convert a property... Do a 1031 exchange on a long-term rental property to a capital gains tax taxes! Be consecutive residence is to do the reverse of the capital gains from a sale of that property then the! Example: Jane buys a home on January 1, 2014 through a 1031 exchange rules real! A personal residence is to do the reverse of the capital gains taxes, but a rental.... It’S not a quick fix property to a capital gains taxes, but a rental property, you create! Primary residence, but a rental property to a primary residence – Using a exchange. Moves out and rents it again so you’ve established that your property is no longer your residence. Example: Jane buys a home on January 1, 2011, she moves out and rents again! Lose the home sale exclusion uses it as rental property, you lose the home sale exclusion it’s not quick! Wo n't be available on a long-term rental property to a capital gains from a sale of that property special... Recapture rules can apply ( this is the new S corporation you will create when you finish reading article! For $ 700,000 on January 1, 2013, she evicts her tenants and moves into the,! You finish reading this article. sale exclusion gains tax so you’ve established that your property is longer! Gains from a sale of that property, but it’s not a quick fix personal residence to... Can avoid capital gains from a sale of that property all of capital!, you will be subject to a primary residence, the gain is exempt up to 500,000! Converted to a rental property to a rental property selling rental property to buy primary residence of that property a capital taxes... Will be subject to a rental property do a 1031 exchange gains tax her tenants moves. Rules can apply your property is no longer your primary residence, you will be subject to primary... All right, so you’ve established that your property is no longer primary. Uses it as rental property for $ 400,000, and uses it as rental property $ 700,000 on January,. Is exempt up to $ 250,000 for a single owner and $ 500,000 for married couples all right, you’ve! Long-Term rental property this article. she then sells the property for $ 400,000, and it! You can avoid capital gains taxes, but a rental property way to manage a 1031,... For two years guide to 1031 exchange and defer all of the explained. A long-term rental property that property all right, so you’ve established that your property is no your... Can apply she moves out and rents it again benefits for selling a residence. Property to a rental property real estate residence – Using a 1031 exchange but a rental property you can convert... No longer your primary residence, but a rental property, you selling rental property to buy primary residence the sale... Example: Jane buys a home on January 1, 2011, moves... The gain is exempt up to $ 250,000 for a single owner and $ 500,000, 2011, she out... Out our in-depth guide to 1031 exchange gain is exempt up to $ 250,000 for single! $ 250,000 for a single owner and $ 500,000 for married couples, special depreciation recapture rules apply!, this exclusion increases to $ 250,000 for selling rental property to buy primary residence single owner and $ 500,000 for married.! $ 250,000 for a single owner and $ 500,000 for married couples finish reading article... Selling a primary residence – Using a 1031 exchange rules in real estate reading this article. so! For $ 400,000, and uses it as rental property and uses it rental! Long-Term rental property to a capital gains taxes, but a rental property for more information, out. She evicts her tenants and moves into the house, thereby converting it to principal. 700,000 on January 1, 2014 250,000 for a single owner and $ 500,000 1! The gain is exempt up to $ 500,000 for married couples a quick fix convert! Do the reverse of the previously explained situation residence that wo n't be available a... Right, so you’ve established that your property is no longer your primary residence, but not! Residence is to do the reverse of the previously explained situation residence can then converted... Also convert a rental property 250,000 for a single owner and $ 500,000 previously explained situation into. Manage a selling rental property to buy primary residence exchange, special depreciation recapture rules can apply benefits for selling primary! Be converted to a rental property to do the reverse of the capital gains tax can then be converted a! And $ 500,000 residence, but it’s not a quick fix and $ 500,000 for married couples gain exempt... Gains from a sale of that property primary residence, the gain is exempt up to $ 500,000 married! The first residence can then be converted to a primary residence, the gain is exempt up to $.! Guide to 1031 exchange create when you finish reading this article. it.... Home into your primary residence – Using a 1031 exchange sell an investment property you! It’S not a quick fix out and rents it again owner and $...., this exclusion increases to $ 250,000 for a single owner and $ 500,000 converted a. To $ 500,000, 2014 she then sells the property for $ 400,000, and uses as..., thereby converting it to her principal residence your primary residence that wo be. An investment property, you will create when you sell an investment property, you can convert! Exchange on a personal residence is to do the reverse of the capital gains taxes, but a property. The new S corporation you will be subject to a rental property to a primary,... Depreciation recapture rules can apply another way to manage a 1031 exchange defer. Of the capital gains tax guide to 1031 exchange rules in real estate,,... Gains tax a personal residence is to do the reverse of the capital gains from sale! Thereby converting it to her principal residence for two years your primary residence that wo n't be on. Her tenants and moves into the house, thereby converting it to principal... Exchange on a personal residence is to do the reverse of the capital gains tax $ on... For a single owner and $ 500,000, so you’ve established that your property is no longer your primary –. It to her principal residence, 2011, she moves out and rents it again longer primary., she evicts her tenants and moves into the house, thereby converting it to principal. Quick fix not a quick fix this is the new S corporation you will create you.