Some mortgage agreements require owners to occupy homes as a condition of approval on a principal dwelling. You can convert an investment property into your primary home whenever you want, though. If you decide to sell a rental or vacation home for more than you paid, the Internal Revenue Service will charge you a capital gains tax on the profit. A gain of up to $500,000 is exempt from taxes if the home is a primary residence. You must live in the home for at least two out of five years before selling to qualify.
Step 1
Move into the home. Have the utilities turned on in your name. Contact your insurance company to change your policy. If you carried landlord insurance, you will need to change it to a homeowner's policy that covers your personal property. For landlords, liability coverage is generally higher due to the increased risk of exposure. The policy protects landlords in case of injury to the tenant or visitors at the property.
Step 2
Notify your employer, banks, creditors and service providers of the address change. Complete a change of address form at the local post office.
Step 3
Update your voter registration address online or by visiting the county's election office.
Step 4
Visit your county property appraiser's office to file for homestead. Depending on your state, you might need to file a homestead declaration and property tax exclusion. Apply as soon as you begin occupying the home to avoid missing out on a tax break. In the majority of counties, the filing deadline is March 1 to receive the exclusion for the upcoming year.
Step 5
List the address on your state and federal tax return. Even if you are declaring rental income from the home during the year, indicate the property as your primary residence when completing your personal information for the refund.
FAQs
First, you must satisfy one rule. You must live in the home for at least two of the last five years. They don't have to be consecutive, but you must occupy the property as your primary residence for a total of 24 months. For example, you bought a home in 2010 as an investment.
Can I convert my rental property to primary residence? ›
To qualify, the homeowner(s) must own and use the home as their primary residence for a total of any 2 of the past 5 years. In order for rental properties that have been converted to primary residence to qualify for the Section 121 exclusion, they must have been owned by the taxpayer for at least five years.
Can you turn 1031 investment exchange property into a primary residence? ›
You must use the 1031 to purchase property you intend to use for investment purposes. However, you can convert a 1031 property into your primary residence after holding it for productive use in business or trade for a period of time. The key is: your initial intent to hold it for investment purposes and.
How do I change my second home to primary residence? ›
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.
Yes, you can! There are important tax and mortgage regulations and requirements you'll need to consider, but with the right strategy, you can make your home an investment while you live there.
What happens when you convert rental property to personal use? ›
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 the 2 5 year rule? ›
When selling a primary residence property, capital gains from the sale can be deducted from the seller's owed taxes if the seller has lived in the property themselves for at least 2 of the previous 5 years leading up to the sale. That is the 2-out-of-5-years rule, in short.
How long does a 1031 exchange last? ›
When the relinquished property closes, the person conducting the exchange has 45 days to identify their potential replacement properties. In total, one has 180 days to acquire the replacement property. Your exchange is completed in 180 days.
How long do you have to hold a 1031 exchange property? ›
Again, there is not a tax code mandate of one year, but it may be that the IRS would like to see at least a one-year hold. The only minimum required hold period in section 1031 is a “related party” exchange where the required hold is a minimum of two years.
How does 1031 exchange work for primary residence? ›
One of the frequent questions we get is: “can I use my primary residence in a 1031 tax-deferred exchange?” Unfortunately, the IRS' short answer is a definite no. Your home is your home, and a 1031 exchange is used to defer the capital gains taxes due on an investment property.
Related parties who concurrently 1031 Exchange or swap properties with each other must hold the properties for two (2) years following the concurrent 1031 Exchange.
How many times can you do a 1031 exchange in a year? ›
The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred. If used correctly, there is no limit on how frequently you can do 1031 exchanges.
Can you live in a 1031 exchange property after 2 years? ›
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.
Can you have two primary residences for tax purposes? ›
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.
How does IRS define primary residence? ›
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.
Can you reinvest capital gains into your primary residence? ›
People who own investment property can defer their capital gains by rolling the sale of one property into another. This like-kind exchange does not apply to personal residences, however.
How do I avoid capital gains tax on primary residence? ›
The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
