Converting your second home to a primary residence has longstanding tax implications and legal requirements that you need to be aware of. This guide will help you understand how the process works.
There are going to be moments when life changes and you’re going to need to make a move to work things around. Sometimes, this means that your second home ends up being the home that you spend most of your time in, rather than just a summer home. When your second home becomes your primary residence, many people assume that it’s just a quick move, but you'll need to follow the proper steps to make everything official.
Can You Make Your Second Home Your Primary Residence?
Yes, you can convert your second home to your primary residence. To make your second home your primary residence you'll first need to move into the home. Then, you'll make it official by taking the necessary steps to update numerous government and business entities of your new primary residence. This typically includes things like notifying your employer and accountant and changing your driver's license and voter registration.
How to Convert Your Second Home to Your Primary Residence
First Things First: Move In
Before you can claim your second home as your primary residence, you will need to move in and make sure that you have written proof. This can be done by doing the following:
- If you had other people living in your second residence, get them to leave. You can do this via a verbal request in most cases. However, some may require sending a lease termination letter or even an eviction.
- Put all the utilities in your name. This is a must, and they must be turned on.
- Forward all the mail to your new primary home. This, too, acts as a method of proof.
- Notify your employer, banks, and insurance agents of the move. They need to be notified in writing or via digital means. You’ll need to complete an address change form at the post office, too.
- If you have children, contact the local school board to ensure they’re signed up for classes. Some schools will allow your kids to start mid-year, while others won’t. It’s good to know what to expect.
- Prepare to spend the majority of your time in your primary residence. You will need to spend at least 183 days here to have it be your primary residence officially.
Next: The More Official Business
Once you’ve moved in and gotten yourself situated, you will have to make sure that the IRS also acknowledges your new home as your primary residence. Otherwise, you will still be paying taxes to the wrong municipality. Here’s how you do this:
- Update your voter registration. You can do this online or by visiting your local office. (Due to COVID-19 restrictions, it may be possible that online registration is the only way to do this.)
- Update your driving license. This is a must if you are going to be living there for an extended period of time, and is also a test the IRS uses for residency.
- If necessary, visit your county appraiser’s office to file for homestead. This depends on the state that you choose to move to. Your appraiser will allow you to file for homestead, which will help you get property tax exclusions. This should be done as soon as you move in.
- Notify your accountant, and list the address as your residence on both state and federal tax returns. This is the only way to ensure that you get the full tax benefits that come with moving into your second home.
- Discuss any issues you may have with a 1031 exchange with your accountant. If you are getting another home through the 1031 exchange, you need to discuss this with a tax professional.
Completing the above is an essential part to converting your second home to your primary residence.
Do You Need To Sell Your Primary Residence?
Though most people who convert their secondary home to their primary home eventually sell off their former primary residence, this isn’t always the case. There is no law requiring you to sell off a house simply because it is not your primary place of living anymore.
Can You Have Two Primary Residences?
Technically, it's possible to have two primary residences. However, most people don’t qualify for this. For you to have two primary residences, the following have to be true:
- Your family has to be too large to fit inside one home entirely. This could mean that you have a family of six or more.
- The LTV ratio is 75 percent or lower. If you’re still just starting to pay off the loan, you won’t qualify.
- Some states will also want to see that you’re paying bills on both. So, for example, the utilities will need to be in both names.
Converting a Second Home to a Primary Residence: Bottom Line
There are going to be many things you need to do to get your second home converted into your primary residence. It’s not as simple as just spending extra time there. It’s a process that involves switching over all your paperwork, updating all your IDs, switching your mail, and making the switch when it comes to taxes.
The bigger issue, for most people, isn’t the paperwork or the lifestyle change. It’s taxes. If you are concerned about capital gains taxes or anything similar, it’s best to discuss it with an accountant. After all, taxes are tricky, and it’s better to be safe than sorry.
FAQs
How to Convert Your Second Home to Your Primary Residence
- If you had other people living in your second residence, get them to leave. ...
- Put all the utilities in your name. ...
- Forward all the mail to your new primary home. ...
- Notify your employer, banks, and insurance agents of the move.
Ownership Taxes and Deductions
Once you occupy the home as your personal residence, you will no longer be able to take any of the deductions you took when the property was a rental. This means you will get no depreciation deduction and you can't deduct the cost of repairs.
What is required when converting an investment property to a primary residence? ›
To qualify, the taxpayer must have owned and used the home as their principal residence for at least two of the last five years. Critically, the IRC can apply both tax statutes if you sell property converted from investment use to a principal residence before the sale.
What happens when you convert 1031 exchange to primary residence? ›
When a property has been acquired through a 1031 Exchange and later converted to a primary residence, the owner faces a mandatory five-year hold period before having the ability to sell obtaining the Section 121 exclusion. The taxpayor still must satisfy the minimum two of five-year occupancy as primary residence.
Can a person have multiple primary residences? ›
Can you have two primary residence mortgages? No, you cannot legally have two primary residences. Even if you split your time equally between two places or in between places while relocating for work, the IRS requires you list one property as a primary residence while filing taxes.
Can I have 2 primary residences in 2 states? ›
Legally, you can have multiple residences in multiple states, but only one domicile. You must be physically in the same state as your domicile most of the year, and able to prove the domicile is your principal residence, “true home” or “place you return to.”
What is the 2 5 year rule? ›
Does it qualify as a primary residence, then? The IRS states, "You're eligible for the [home sale] exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale."
How to avoid paying capital gains tax on sale of rental property? ›
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
How much capital gains tax on $200,000? ›
= $
| Single Taxpayer | Married Filing Jointly | Capital Gain Tax Rate |
|---|
| $0 – $44,625 | $0 – $89,250 | 0% |
| $44,626 – $200,000 | $89,251 – $250,000 | 15% |
| $200,001 – $492,300 | $250,001 – $553,850 | 15% |
| $492,301+ | $553,851+ | 20% |
Jan 11, 2023
In this case, you must own the property for a total of at least five years if you want to exclude the capital gains when you sell it as a primary residence. The ownership period can be divided into a portion of personal and rental use, with at least two years for each usage.
It's not uncommon for someone to decide to convert a second home to an investment property at some point. It's best to read your mortgage paperwork to verify there aren't any restrictions on how long the home has to be used as a second home to avoid an investigation for occupancy fraud.
What is the capital gains tax rate in 2023? ›
For the 2023 tax year, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
How long does it take to convert a 1031 to primary residence? ›
Your personal use of the property, including occupancy, must not exceed either 14 days or 10% of the total number of days you rented out the property within 12 months. This exchange only applies to single-owner properties. Once the 24 months conclude, you can move into the property and declare it a primary residence.
How long before you can convert a 1031 exchange to primary residence? ›
Property Converted from Investment to Primary Residence
First, if you acquire property in a 1031 exchange and then convert it to your primary residence, you must own it at least five years before being eligible for the Section 121 exclusion.
How long after 1031 exchange can you make primary residence? ›
For example, if an investor decides to transform their rental property into their primary residence, they can do so if they follow the rules. The primary stipulation from the IRS is that the investor must maintain the property as a rental for at least two years following the exchange.
Can a second home be close to your primary residence? ›
A second home is a property you purchase in addition to your current home to live in for part of the year. Lenders may require proof the property is at least 50 miles from your current residence to be considered a second home.
What qualifies as primary residence IRS? ›
If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circ*mstances" test to determine which property is your main home. While the most important factor is where you spend the most time, other factors are relevant as well.
How long before you can move into a 1031 exchange property? ›
Real estate investors who want to move into replacement properties acquired via 1031 exchange should rent the property out for a minimum of two years to clearly demonstrate their intent that the property was purchased as an investment.
How to buy a second home without selling the first? ›
Using home equity on your home or the new house for the down payment. A home equity line of credit (HELOC) or a home equity loan are ways for buyers to tap their current home's equity before selling the house. A home equity loan is essentially a second mortgage to provide cash that can be used for any purpose.
