How can you maximize the value of your primary residence? You can always sell it, but there is another option that is becoming increasingly popular. Converting your home into a rental property is a fantastic way to earn passive income, take advantage of tax exemptions, and build long-term wealth. However, there are some things you should know before you decide to go this route.
First, speak with your lender if you haven’t paid off your mortgage. Often you must have lived in your home for at least 12 months before converting it into a rental. Also, check local laws and HOA regulations to make sure it’s legal for you to make this switch.
There are some fantastic pros to converting your primary residence into a rental. For example, you’ll have a steady stream of passive income you can use to invest in other areas.
There are also many tax benefits to rentals. Unlike primary residences, there are deductions that rentals may qualify for, including advertising, repairs, cleaning, and maintenance. However, the most important tax benefit is the depreciation expense. This is an exemption for general wear and tear, and it could make your rental income tax-free.
There are also some cons to turning your primary residence into a rental. Maintaining a rental can be a full-time job unless you pay a property management company to do it for you. Also, depending on how long you keep the property as a rental, you could forfeit the ability to exempt yourself from capital gain taxes when you eventually sell. You can get around this using a 1031 exchange, but you then have to use the funds to purchase another investment property.
Your personal situation impacts whether or not it makes sense to convert your primary residence into a rental. If you’d like to discuss the topic further, don’t hesitate to call or email!