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Converting a Personal Home to a Rental Property


If your client wants to move and is deciding whether to sell their home or rent it out, you'll want to consider the pros and cons of each before you advise them. In this article, tax expert Julian Block discusses the tax relief available to home sellers as well as the rental write-offs they'll receive as landlords.

Jan 13th 2022
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I recently received a query from a couple that I’ll call David and Ruth Anderson. They wed two years ago, own a home in an area where sales prices have soared, can easily handle real estate taxes and monthly mortgage payments and have a combined income, mostly from salaries, of $90,000. 

They’re considering moving into a new dwelling. Plan A is to convert their present home into a rental property, while Plan B is to sell their home with an anticipated profit just north of $300,000. What do I think of Plan A? It all depends, as their decision is an inherently subjective one. Viewed solely from the perspective of taxes, I am able to say with complete confidence that Plan B is akin to chicken soup: it can’t hurt, and it could help. 

Our lawmakers carefully crafted Code Section 121 to help sellers like David and Ruth. It allows them to escape taxes on as much as $500,000 of profit from the sale of their home (or $250,000 each if they file separate returns). 

The couple qualifies for the profit exclusion only if they have owned and used the home for an aggregate of at least two years out of the five-year period that ends on the sale date. Another stipulation is that at least two years must have elapsed since they last availed themselves of the profit exclusion. If they sell, they could use the proceeds, undiminished by taxes, for that new home or anything else that pleases them.

Here are the pros and cons of Plan A.

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