Author Topic: primary residence to rental property  (Read 608 times)

Uturn

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primary residence to rental property
« on: November 18, 2017, 08:01:18 PM »
I bought my house in 2007 for $152k.  It now comps out at $220k.  Through extra payments and refi, I owe $83k at 3.2%, PITI is $1100.  I talked to a property manager who says I should be able to rent it at $1950/mo.  I was offered a job that would relocate me from Ft Worth, TX to Cary, NC.

The house was built in 1995, and the original owners seemed to like 80's fake brass and golden oak cabinets.  I have replaced most of the brass light fixtures.  A few months ago I stripped and stained the cabinets in the kitchen and master bath.  I also pulled down the flower wallpaper in the kitchen.  However, since I just don't have the color picking gene, I have not put in a backsplash or replaced the white Formica counter tops.  Since the backsplash, counters, and doorknobs are already in the budget for this year, I was going to move forward.  However, she said to wait until I move out, then I could write off those improvements, since it would be rental expense and not residence expense.

Is she giving me good info?  Can I really finish my home improvements and get a tax break? 
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Goldielocks

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Re: primary residence to rental property
« Reply #1 on: November 18, 2017, 09:57:38 PM »
Yep.   Improving it to rent out is a rental expense.  Depending on what you do and when, it will adjust your ACB (against capital gains), or it will be counted as an annual operating expense (e.g., painting the bathroom).  But, you need to be NOT using it as a residence.

tralfamadorian

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Re: primary residence to rental property
« Reply #2 on: November 19, 2017, 06:45:14 AM »
Yep.   Improving it to rent out is a rental expense.  Depending on what you do and when, it will adjust your ACB (against capital gains), or it will be counted as an annual operating expense (e.g., painting the bathroom).  But, you need to be NOT using it as a residence.

+1

clarkfan1979

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Re: primary residence to rental property
« Reply #3 on: November 24, 2017, 11:11:13 AM »
I like primary residence to rental property conversions. I have done it twice. I like the fact that you can predict repairs going forward in the future. You have lived in the house. You understand how it operates. You have more knowledge available to yourself for repairs.

My garage door opener on one of my rentals finally broke. I knew it's days were numbered. I'm surprised it lasted 5 years after I bought the house. I could have replaced it on day 1. However, I didn't want to replace it until it actually broke. 

Uturn

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Re: primary residence to rental property
« Reply #4 on: November 25, 2017, 06:32:20 PM »
My house is a 4 bedroom with two living rooms.  After my divorce, I looked into downsizing, but I got such a good deal on this place, the numbers just didn't make sense.  So about 6 or 7 years ago, I made some modifications to make it fit me better.

I knocked down the wall between my garage and a spare bedroom in order to extend my woodworking shop.  I also pulled up the carpet in the second living room, put down rubber flooring, and made it a gym. These two upgrades won't appeal to the masses, so I need to downgrade my house back to a 4 bedroom and two living rooms.

Since I will spend money in December to convert the house back, but it won't be ready for tenants until January, what year to I claim the expenses?
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Goldielocks

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Re: primary residence to rental property
« Reply #5 on: November 25, 2017, 07:25:28 PM »
From my knowledge you need to:

1)  Move out.
2) Figure out if your costs are considered expenses or capital improvements. (Walls are usually a capital expense). 
3) Rent it out.  (if you do 1 and 2, you still may be denied claims if you never rent it out)

You can start claiming after you move out.

If you are updating it to rent out a room, I think you are limited to upgrades to that room and / or a sole use washroom, not your living room.

tralfamadorian

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Re: primary residence to rental property
« Reply #6 on: November 25, 2017, 07:32:36 PM »
Since I will spend money in December to convert the house back, but it won't be ready for tenants until January, what year to I claim the expenses?

Very important- you cannot claim expenses from before the property is put into service. So, that means you need to list it for rent before making these changes- just moving out is not enough. If you move out, do the renovations, then list the property for rent, the renovation cost would be rolled into the basis for the property and depreciated over a much longer period of time.

Goldielocks

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Re: primary residence to rental property
« Reply #7 on: November 25, 2017, 08:25:40 PM »
Since I will spend money in December to convert the house back, but it won't be ready for tenants until January, what year to I claim the expenses?

Very important- you cannot claim expenses from before the property is put into service. So, that means you need to list it for rent before making these changes- just moving out is not enough. If you move out, do the renovations, then list the property for rent, the renovation cost would be rolled into the basis for the property and depreciated over a much longer period of time.

Depending on the expense, if they are considered capital costs, this will happen anyway, but good point.

adamcollin

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Re: primary residence to rental property
« Reply #8 on: November 27, 2017, 12:09:03 AM »
I agree with Goldielocks.
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SeattleCPA

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Re: primary residence to rental property
« Reply #9 on: November 27, 2017, 07:11:21 AM »
Have you thought about the Sec. 121 exclusion you're going to lose by converting a principal residence to a rental?

If not, probably a good idea to carefully consider economics of losing that benefit...

My general comment: If you have appreciated principal residence and qualify for tax-free treatment of your gain, it never makes sense to convert to rental.
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Uturn

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Re: primary residence to rental property
« Reply #10 on: November 27, 2017, 07:56:45 AM »
Have you thought about the Sec. 121 exclusion you're going to lose by converting a principal residence to a rental?

If not, probably a good idea to carefully consider economics of losing that benefit...

My general comment: If you have appreciated principal residence and qualify for tax-free treatment of your gain, it never makes sense to convert to rental.

I have not thought about that.  I am sitting on around $70k in appreciation right now. 
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SeattleCPA

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Re: primary residence to rental property
« Reply #11 on: November 27, 2017, 12:21:59 PM »
You just have to do the math... but consider that right now, that $70K of gain would be tax free...

Ignoring commissions (which you can't actually do) it almost makes sense to sell the one house, book the $70K of gain without paying tax, buy the identical house one street over, and then turn that house into a rental (using a $70K higher cost basis).

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