We converted one of our homes we purchased as a primary residence because we couldn't get it sold at the time. We didn't intend to hold onto it for as long as we did but such is life.

If I remember correctly (it's been a while so ask a CPA), you can avoid the CG tax if the home was your primary residence for 2 of the last 5 years

You take the depreciation every year. When you go to sell it the depreciation (whether you take it or not) is recaptured in your taxes, so our CPA told us to take it because otherwise you are loosing out.

To avoid capital gains when you sell you can do a 1031 exchange. I've been through two of these, one I assisted at work with commercial the other with my parents and was residential. There are rules and regulations that you follow.

Hope this is helpful

aggieswmr04 said:

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We converted one of our homes we purchased as a primary residence because we couldn't get it sold at the time. We didn't intend to hold onto it for as long as we did but such is life.

If I remember correctly (it's been a while so ask a CPA), you can avoid the CG tax if the home was your primary residence for 2 of the last 5 years

You take the depreciation every year. When you go to sell it the depreciation (whether you take it or not) is recaptured in your taxes, so our CPA told us to take it because otherwise you are loosing out.

To avoid capital gains when you sell you can do a 1031 exchange. I've been through two of these, one I assisted at work with commercial the other with my parents and was residential. There are rules and regulations that you follow.

Hope this is helpful

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This seems right from what I remember having done it 10 years or so ago. There were various conditions that had to be met, numbers/values you had to supply.

I don't remember it being a problem or particularly hard.

Not a big deal. Used to have some crazy rules(equity, assets, reserves), but most of those were relaxed.

Any accountant that prepares individual income taxes should be able to have a conversation about this with you. It's a fairly common event and relatively simple concept.

Having said that, don't factor in the deprecation recapture into your calculations unless your income is going to increase significantly. I say that because recapture is simply paying back the benefit you've already received. You get to take the depreciation now (which means less taxes) and then pay it back at the time of sale (more taxes) so it comes out close to a wash and usually in favor of the tax payer.

Recapture is essentially recouping the amount of depreciation you have claimed. The basis for your depreciation would be the lower of the Fair Market Value (on date of conversion) or the adjusted basis (original purchase price + any improvements made). Generally speaking, most people end up using the adjust basis, especially in today's market.

https://www.irs.gov/publications/p527/ch04.html#en_US_2016_publink1000219148

Having said that, it's still a moot point, you're literally just repaying benefit received. Let's say you have a rental home for 10 years and depreciation works out to be $20k/year and you're in the 25% tax bracket. Over the 10 years, you would have a total tax benefit of $50k. When you sell at the end of that 10 years, recapture would basically be just you repaying that $50k. The gain would be calculated separately.

I wouldn't convert to a rental unless the property would be a good "stand alone" rental investment. IOW, would this be a good rental property if you were buying it as a rental investment? If not, sell!

Rules of thumb - Can you get 1% of FMW/month in rent? Will you have 100% occupancy for the next 2 years? Are your maintenance costs and taxes going to be out of line with the rent income? Will you be forced to take renters with poor credit in order to reach your desired rental rate?

Sooner Born is right. Maximizing the current basis saves you tax money now, but you pay it back later. I would advise setting the basis as high as you can, since saving money now is generally better. In my case, FMV after 15 years of ownership was sadly lower than our purchase price plus improvements.