Don't Convert Your Primary Residence Into a Rental Property
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- Опубліковано 30 вер 2024
- In this video, we talk about why converting your primary residence into a rental property might not be a good idea. While the benefits of rental income, appreciation, possible tax advantages, and temporary moves may be valid reasons to consider, we also don't want to forget the potential loss of a capital gains tax exemption. Selling a primary residence can provide tax-free gains of up to $250,000 for individuals and $500,000 for married couples, which can be reinvested for further growth! Check out this video and consider the long-term advantages of selling and reallocating funds rather than converting your primary residence into a rental property.
Here's what the IRS has to say about the tax-free sale of a primary residence - www.irs.gov/ta...
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Other links you might be interested in:
Seller Closing Costs & Estimated Net Proceeds - • Seller Closing Costs &...
Accidental Landlord | Why Fewer People are Selling Their Homes - • Accidental Landlord: W...
Steps to Buy Your Next Home: How to Sell & Buy at the Same Time (Move Up Buyer) - • Steps to Buy Your Next...
Home Seller Guide - • Home Seller Guide
8 Mistakes Home Sellers Make and How to Avoid Them - • 8 Mistakes Home Seller...
I believe the retirement crisis will get even worse. Many struggle to save due to low wages, rising prices, and exorbitant rents. With homeownership becoming unattainable for middle-class Americans, they may not have a home to rely on for retirement either.
Got it! Buying stocks during a recession when prices are down could be a good move. You might get them at a lower price and sell later when they go up. Just do your homework and be aware of the risks before diving in!
That's awesome! Investing in stocks with a reliable trading system can lead to great outcomes. It's fantastic that you've been working with a financial advisor for a year now. Starting with less than $200K and being just $19,000 away from making half a million in profit is impressive! Keep up the good work!
Mind if I ask you to recommend this particular coach you using their service?
Carol Vivian Constable is the licensed fiduciary I use. Just research the name. You’d find necessary details to work with a correspondence to set up an appointment..
She appears to be well-educated and well-read. I ran a Google search for her name and came across her website; thank you for sharing.
I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for.
@SullivanSpencer67 That's actually quite impressive, I could use some Info on your FA, I am looking to make a change on my finances this year as well
@SullivanSpencer67 The crazy part is that those advisors are probably outperforming the market and raising good returns but some are charging fees over fees that drain your portfolio. Is this the case with yours too?
@SullivanSpencer67 I will give this a look, thanks a bunch for sharing.
I can understand your frustration, but fortunately I was able to retired 2 years ago and with house paid for and luckily have a all-time high IRA/Roth accounts. My investment is long term mostly S&P 500. No financial advisor needed.
Kids, never follow your real estate agent for financial OR tax advice. Let them stay in their lane
The 121 exemption is golden.
My dad's buddy used that to build a new primary residence every few years and quickly worked his way up to millionaire status. I help him with 2 of them when I was in high school. He bought 2 properties in San Jose and fixed them up into rentals in 98.
Made a fortune on them. One he's had the same awesome renters in for that whole period. Never raised rent on them.
The other property he sold and made a million in profit on.
I'm building my first house this year. Going to shoot for the same model and use it to build wealth.
It's like taking retirement investment advice from a life insurance salesman.
😂👏🏿👏🏿
I already had a similar plan to what he's saying so.... lol
AAHAHAHAAHAHA... yes, you're right.
If you can afford to hold onto it, the appreciation and equity will out weight the capital gains.
Most likely if you want to hold onto it for long enough
@@alirazacan good point
It's not exactly "free money" to sell, take advantage of capital gain exemption, and reinvest. You still have to pay ~6% in closing costs, which can add up, especially if your property is appreciating close to the capital gains exemption limit. Let's say you buy a home at $500k with $50k down, and homes in the area appreciate at $100k/year for an extreme example. In two years, your home is valued at $700k and you now have around $250k in equity. Let's say you reinvest in a $700k property to avoid capital gains. At 6% closing costs, that would be $42,000 out of a $200,000 gain. In two years, the property is worth $900k, and you decide to reinvest again. At 6% that would be another $54,000, for a total cost of $96,000 out of a $400,000 gain. Compare that to a second scenario, where you hold on to that property and only sell once after 4 years. Your property appreciates from $500k to $900k. At 6% closing costs, that would be $54,000. 15% tax on the $150k over the exemption limit would be $22,500. In total, it would cost $76,500 out of a $400,000 gain. So you would actually gain about $20k comparatively (give or take) holding on rather than selling twice, even though you're paying taxes. Not to mention potential income from renting if you did so for 2 out of those 4 years. Not saying this is true for every scenario, but I would advise you do the math completely.
Super thoughtful and detailed comment. Appreciate it. Selling certainly isn’t free, but costs of selling a primary residence or rental would be the same for this situation. The net proceeds can be tax free, though. In the scenario you outlined, I agree that it would make sense to move one time and pay a small amount of capital gains tax on the portion above $250k. It doesn’t always make sense to sell just because you are nearing the capital gains exemption threshold. It also doesn’t always make sense to wait until you hit it to sell.
Why not just get a Heloc on it while its your primary for the full equity. Then buy your next house and use your equity as you see fit and let the new tennants pay down your prior mortgage and the new heloc forever.
Exactly
I have a duplex for 2.75 fixed and I’m planning to keep it as a rental. If I ever want to sell it I’ll just 1031 it
Sweet! Great plan to delay capital gains if you want to build a long-term rental portfolio.
What 1031 ?
I want to make my upstairs into an apartment..while I live downstairs..can anyone give me some advice??
the transaction costs of selling and re-purchasing a similar property will be larger than the capital gains savings - so for example on a $250K gain on a $1M sale the capital gains savings will be 15% of the $250K or about $35K. The transaction costs from re-aquiring another $1M property would be higher than $35K - therefore it would be best just to keep and convert the property to a rental. The only person making out on the strategy being proposed is the realtor:-)
People would probably hold on to the property due to having an interest rate at 2.5% versus if I were to sell. Right now you're going to get 7 plus percent. Why would you still sell? Why wouldn't you take a heloc? You more than likely wouldn't cash flow due to the high interest environment currently
Many are choosing to hold on to their homes because of the low-interest rates. It's a great idea if they want to be buy and hold investors for the long haul.
Regarding HELOCs, they have high rates right now, too. In most cases, even higher than mortgage rates. This is what BECU is advertising right now...these rates are much higher than current mortgage rates after the introductory period:
"Great news! From now through Aug. 19, 2023, get a low 4.99% APR introductory rate for six months on new home equity lines of credit (HELOC). After the introductory period, your rates will range from 8.24% to 11.09% APR based on your creditworthiness and property type.1"
www.becu.org/loans-and-mortgages/home-loans/home-equity
If you're looking at big picture you can move back in to these homes 20-30 years later when they are paid off and you were cash flowing all those years because the low interest rates. For example I bought a primary in 2020 with 3% rate. If I took his advice I could have sold it at 100k profit because appreciation. Instead I rent it out at 1k above the mortgage for easy cash flow. House today 200k more than I bought. I'll rent it for 30 years. Move back in and live in it for 2 years. By then if married and appreciation still goes up I can get 500k capital gains break. You can always move back in down the road. Of course real estate agent wants you to sell...if you don't sell they don't make money off you.
Simple math. If I continue renting at 1k above mortgage that's 12k yr. 30 years of that is 360k. Then you take out any months not rented out and any costs associated with maintenance of home you'll still come out way ahead and still avoid 250-500k in capital gains.
And if you rent it out for 2-3 years after living in it for the last 5 it's a good trial to see if you like landlording or not. At that point you can put it on market and still avoid cap gains if renting it out isn't for you.
Some great thoughts, Austin! I think this strategy works, but requires the owner to move back into their rentals at a future date. Many won’t even if they plan to now because of changes to life circumstances.
You can’t move back in and get the full exclusion. That time rented is considered non qualified. So you can only exclude the prorated time that you lived there.
This is how middle class think . Not the rich
How do you mean?
Unless tax rules have changed recently, a home owner can live in a primary residence for at least two years out of the 5 years. So, potential to rent for at least 3 years before the sale of property and not pay capital gains. As advised, talk to an accountant.
my understanding, too
Obviously there are tradeoffs to everything, but this video does a horrible job of going over them. For something like this, numbers and examples are king. Don't throw "up to" around like you're a department store looking for suckers. Talk about the actual numbers an actual person can actually expect to see.
100% came to comment. This video is rubbish.
If your are military that had to
move due to a PCS then the capital gains exemption period is extended by 10 years, meaning if you lived in it for two years out of the last 15 years you can exempt $250k in taxes if your single or $500k if your married
That's cool, I didn't know that. Makes sense. Thanks for sharing!
Exactly a decision im debating now. Got a Springfield va townhome for $415 last November. Mived out here for military job. Plan on owning home for 13 years, maybe 1-2 more.
My current plan was to refinance 2025-2026 after rates lower. Was gonna do a 30 year and pay the difference to make it equal 15, just safer in case i need the extra cash at some point.
This way i can sell, retire from military witu pension and have a large sum of cash for final home.
Two coworkers keep trying to get me on the renting side instead though. Id really rather just sell for a large profit, get a nice house back home close to paid off. Get that paid off before 50 and have a paid off home with pension and another job. Just sounds so nice and safer and easier. For me that would be financial freedom and a point um super happy
Sounds good. Very lucky you have a pension in the equation!
@@planetwalker798 yes, very much so. My plan would be different otherwise. I'd probably be putting much more towards my TSP fund than I currently am.
I would have paid them money to get out!
Very simplistic for 9min video with the reasons near the end. You can combine 1031 and section 121. I would have renamed this.
Why would you pay the closing costs and buy a different rental property (that you again are paying closing costs on?). Rent it out and then do a 1031 exchange down the road.
Video is by a real estate agent not an investor
@@richbone0411 I'm a real estate agent too, and his stance does not make sense to me.
This is bullshit advice.
Ummmm 100% disagree. Realtor giving investment advice lol.
Who wants to sell just to get a higher interest rate? You are mad
Not sure anyone is selling just to get a higher interest rate. There is usually much more involved in the decision.
Seems like sound advice to me.
YUP.
Why in the world do you have such a distraction of busy traffic driving behind you?
Keeps things interesting
It looks like it's playing on one of those TV frames.
This video quality is really well done! Do you mind me asking what kind of camera and mic you use?
Its in the real estate agents interest to sell your home.
Of course real estate agents benefit from selling homes. Does that not make it a good thing for people to do in some situations?
My wealth building strategy is going to be to build a new primary residence every few years. Sell it and move into the next "upgrade" once I qualify for the section 121 exemption again. If I can make $500k tax free every 2 years that is the equivalent of $390k annually taxed as regular income.
Building the first one this year. $250k in land, permits and materials and I should have about $300k-400k profit.
Worst case the market crashes and at least I'm not upside-down in a mortgage.
I like it! A good family friend used that strategy for years and it worked great for them. They are now a retail builder.
@@McDonaldResidential, I helped my Dad's buddy build a couple houses when I was in high school.
After he got divorced, he did this for years. Then moved out to California in 1998 and bought 2 properties he fixed up into rentals. Had the same renters in one of them for 25 years. Never raised their rent because they are great people and perfect tenants.
The other place he sold a few years ago and made over a million on it.
Now he's sipping margaritas on the beach, he retired in Mexico.
@@getinthespace7715 Good for him! Nice!
@@getinthespace7715 where did he retired in Mexico>?
Yeah sometime s we want to move but dont want to sell, also my house rented out would pay its own bills pluse lots of income if rented
Glad it’s working out!
Why sell a home at a 2.65% rate? If you buy another home, call it the dream home. Why not rent it out till you retire? If you’re paying a lot of taxes, it means you made a lot of money.
That’s sound logic!
Terrible advice
How so?
Sell it to an LLC that you own, then begin taking depreciation and start paying back the mortgage and book your 500,000 gain if it’s done up that much
Ok, not bad for a real estate agent. Misses a few important key points, including avoiding depreciation recapture (if you're going to discuss cap gains, and don't include that given the audience, it's respectfully not exactly complete) and especially opportunity cost, because it's not a decision made in isolation. Should one make a decision based on this, no, however Zach has lots of disclaimers and adds value because it starts the conversation and thought process. Lots of moving parts that really do require advice from someone who works in this area as their full-time focus if you want to avoid potentially costly mistakes.
Appreciate the thoughtful comment. I didn’t spend much time on the benefits of keeping a primary residence or buy and hold real estate investing because there are tons of videos about that topic already.
Facts 💯
Appreciate the food for thought.
You got it. It's not the answer for everyone, but everyone should at least weigh their options.
there's nothing the "average person" can invest in that outperforms real estate so its pointless to invest in stocks, businesses etc. i can see why you love it when people sell their most valuable asset though because you're a real estate agent!
So just sell, lose all transaction costs because selling isn’t free, and reinvest in what exactly that will have a higher roi?
This video is referring to selling a primary residence when you move out, so you'd buy another primary residence. You could either put that equity into the new home or re-invest some of the proceeds into a second real estate purchase or stock market. Selling costs are way cheaper than paying capital gains taxes. And you'd pay both if you cash out down the road after the home loses its status as your primary residence.
Just keep doing 1031 exchanges.
Certainly a good strategy if you want to defer paying taxes on rentals
Okay suppose I rented a home out for example 20yrs can I come back and live in it for 2yrs as a primary so I can then sell it and take the 250k tax deduction? Technically I lived in it for 2 out of the last 5yrs. So is it 2 out of the last 5yrs that I owned it? If so then I wouldn’t qualify for the tax deduction
That should work based on my understanding of the rules. I’d talk to your accountant about depreciation recapture.
Unfortunately, there is a catch that makes it not as beneficial to use that strategy of living in your rental for a couple years before selling it. If there is a period of time that it was a rental property before the period of time that you lived in it, those years are called "nonqualified use" and it reduced the amount of your gains that you can exclude (proportionally). That's an aspect of the section 121 exclusion that is often overlooked.
Nice try Opy Black Rock would love you ! Sell and then what ? Oooooh I forgot there is a yuge inventory of prime real state that nobody wants to buy …😏 … and forget that awesome interest rate you got on the house you loved . Just get three more part times and you will be good … no thanks
not if you pay CASH for the new home. Otherwise yeah if you have a low mortgage and you've had it for awhile......hard to say.
If you don’t sell your home, I can’t make money!!
if you do use it as a rental for a period of time , what does it take to convert it back to a primary residence ?
1031 exchange. There, I fixed it.
1031 on a rental defers your taxes vs. tax-free gain with primary residence exemption
@@McDonaldResidential yes, but thats a delineation without a difference. Taxes delayed are taxes not paid. Why not have the goal of buy, borrow, die? Holding at least one rental perpetually offers cash flow and decreasing mortgage balance, depreciation deduction, and typically increased rental income over time. When fully depreciated, 1031 to a larger more expensive rental and repeat. Need cash out? Take a Heloc. Never take the cap gains hit.
Does the 2/5 year rule still apply to avoid capital gain taxes in California if you own another home at that time ?
Looking to purchase my second property
I believe so as long as you're not trying to double-dip on the exemption and sell both. I'd check with your accountant on that.
Could've made it clear near the start of the video, or in the title or description, that your only point is around US tax law and the video is a waste of time to watch if you are outside the US.
True, this video is for US homeowners. Sorry you feel like you wasted your time.
If just rent it out for 2 years can I still qualify for the primary residents (still live in it 2 out of 5 years at the time of the sale?)
that should work as long as you don’t sell another primary residence in the same timeframe
I myself struggle with this greatly. I own a home that I bought in 2016 4% and mortgage is so affordable. I would like to move but not quite ready to sell it...... I'm so very torn on what to do???
I know what you mean.
On paper my scenario could suggest selling (equity) but haven't seen something I like "more" (meaning home value). But maintenance and PT hover over...
We lived in our home for 16 months but we have to reloacte out of state. If we convert it to a rental, does that mean we would have to pay capital gains if we decided to sell in the furture?
Thanks
The general rule is 2 years of occupancy out of the previous 5, although there are many nuances. Here is more info from the IRS website - www.irs.gov/publications/p523#en_US_2023_publink100073096
Your accountant will be able to help you more in this department.
For retirement, we will move into our rental condo in Palm Springs and convert our primary residence into a rental for two to three years and play the appreciation game. We will sell before the five year mark and take the capital gains exemption. Even with recapture of depreciation, we are still ahead of the game!
Nice! Trying for the best of both worlds!
What were the “different ways 7:40 “ you could 1031 and not ever have to pay the taxes on the profit?
1031 on rinse and repeat
Bad advice, review 2 out of 5 years rule on rental properties.
www.irs.gov/publications/p523#en_US_2022_publink100073096
Too slow…
So what if you moved back into the rental as your primary residence how long would you need to live in it before you sold it? Married or single?
2 out of the 5 years prior to selling
When you have years of non-residence use (a rental) that occurred before the years you lived in it, that does reduce the amount of capital gains you can exclude. That's an aspect of this that is often overlooked when people are only aware of the "2 out of the last 5" part of this tax code.
You are so wrong, full of bs. If you live in it for 2 years then turn it into a rental you dont pay capital gain
Nobody pays capital gains unless they sell
has to be two out of the last prior 5 years.
Is this tax free gain only in the USA?
This video is for US
so if you convert your primary residence to rental, does it considered as an investment property now? and taxation will be much higher as for investment property? or will taxes remain as owner-occupied property? does anyone know?
Current rule is you need to have lived in the house for 2 out of the last 5 years when you sell
The county will eventually send you a letter where you must prove that it is still your primary residence. If not, then your property will revert from primary to investment property tax rate. Where I am, SC, that is 4% to 6%. Hope that helps.
@@richbone0411 interesting, so you get taxed a higher property tax rate if not owner copied in SC?
I bought my first home in 2020 with a 2.7% interest rate. Thinking of getting a second home in 2025 at a lower interest rate. Can I legally rent out my first home and move into the second one? Is it a good idea, and what are the pros and cons?
I don't see why you can't do that! I think I cover the downsides of doing so in this video. Lots of people use this strategy to acquire rentals with lower interest rates and down payments. And then hold for a long time.
I'm curious about whether I might face any issues if I decide to rent out my initial residence. I'm thinking of applying for a loan, considering it as a secondary home rather than an investment loan.
@@McDonaldResidential
You think interest rates will drop in 2025?
Cash out refi then convert to rental
Good strategy if you want to build a rental portfolio
Wonder if the IRS could make an exception on the 3 year rule and we can just pretend the last 3 years didn't exist 😂 seems like an obvious hole in the moratorium rules. Feel for the person sucks.
He's working with them on that
There is a hardship provision. that allows the homeowner to get some exception if they haven't met required two years.
Rent but not rent to own. We are selling our home which we own free and clear. The buyers want to move in and do the inspection repairs, new flooring,etc. So they will rent for 6 months. We, the sellers pay for materials and the buyers do the work. Not rent to own, just rent. But there is a sales contract that is valid for 6 months, so the purchase price is set and the buyers can purchase. But the work needs to be done for acceptable bank appraisal first. Post-inspection repairs take time, and this way the buyers get what they want in terms of trim works, flooring, etc. The seller gets the work done essentially free labor, and can deduct the cost of materials since it is considered a rental for those 6 months.
Ok, so sounds like you are selling your home in 6 months after the tenant either purchases it or moves out?
@@McDonaldResidential Exactly, we pay for all materials and tenant does the work (laminant flooring, trimwork,etc.). Plus we get a rental income for those 6 months, while the tenant can fall in love with the home.
@@RetrieverTrainingAlone Cool idea you worked out with them!
He seems shady
super haha
Would you use this advice when using the VA loan to purchase primary residence properties? Right now, I’m trying to use as little cash as possible in order to build my portfolio!
VA loans are for purchasing a primary residence. I believe you would need to refinance your mortgages if you are planning to build up a rental portfolio.
You're probably better off in the long run buying with a low down payment conventional loan that you don't need to refinance once you buy your next primary residence.
Has anyone used the strategy mentioned above?
@@McDonaldResidential You have to live in the property for I think it’s 6-9 months. No refi necessary. Plan is to just buy properties every couple of years when I move and turn them into rentals
I bought my house in 2020 and i am relocating to another state, i have lived in the house for 3 years now and planning to rent it out. Will this affect my capital gain tax exemption if i were to sell in a year or two?
This is right off the IRS website - " You're eligible for the 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". Should be fine if you sell within a couple years after moving out, but I'd double-check with your accountant. Here's the link to more info on the IRS website - www.irs.gov/taxtopics/tc701
1031 it
A great strategy for rolling money from one rental to the next
Of course. You want to keep invested right? Keep getting passive income (rent), keep getting equity appreciation, keep getting tax deductions (depreciation). Roll it over to a higher value rental (multi family, luxury, high acreage) via a 1031. Never take the cap gains ever. Need a large sum of cash to buy a lambo? Get a HELOC. BUILD WEALTH. Buying, selling, cashing out is how you can go broke trying to time the market. That’s what is happening now. Go in with Hodl mindset and eventually you won’t need to work.
I’m a buy and hodl
Buy and hold is great. Do you buy a new primary residence and convert the previous to a rental? Or keep the same primary and purchase rentals separately?
total madness video... wont even waste my time debating this. folks do not blindly follow a random guy on youtube... he's counting clicks thats about it...
Which part?
FYI to those thinking about this like myself, there is also something called depreciation recapture tax from renting your home if you ever sell and don’t do a 1031 exchange
yep
Great video. However, if you purchase a property and live in it for a believe it is one year and then move out and make it into a rental property. Then you do not have to pay capital gains tax on the property.
That's incorrect. This is what the IRS website says about the capital gains exemption: "In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the 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. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale." www.irs.gov/taxtopics/tc701
Hey Zach, great video and had a question regarding my situation to see if you think making my current primary residence a rental is a good idea. I've lived in my home for 3 years. Interest rate is 3.125% fixed 30 yr conventional and mortgage is $1350/month (mortgage is 240K, current appraised value of $375K). We live in a great area and through the homework I've done I should easily rent my place out for $2000-2500 / month. Yes I could sell and make a decent amount, but due to the lower interest and the area being a highly desired area I feel like this could be a long term investment opportunity to keep it....especially if I can find good tenants in the $2500/month range.
We would be downsizing and looking into another highly desirable area and like to start doing the same thing (move every 2 years and keep each property as rental). Also, my thought was if I keep buying a house as a new primary residence, can't I then put down less money (less than 20%) with each new purchase as I will be claiming it as primary. Just looking to see how best to start acquiring rental properties slowly as I am in my twenties.
Any info is greatly appreciated! Thanks!
The plan you outlined is great! Many use it successfully to acquire rental properties with lower interest rates and less money down. Both are benefits of purchasing a new primary residence and then converting it into a rental later on. Great strategy if you want to accumulate rentals.
What market are you in?
@@McDonaldResidential I'm in Alabama, currently looking at 5 different markets in the state all within about 3-4 hours of eachother, all of which are in the top 10 school systems in the state. It's harder to get the best deal possible in these areas (especially areas near the gulf) but I'm content with playing a long term game and knowing I am in areas that should build equity during higher market times down the road. Sorry for the late response as I have been traveling alot in preparation for leaving the company to work in a mostly remote position (which should help my real estate journey progress!). Thanks!
congrats on the remote position!@@joshfreeman3452
Hell no.. apprasiers are pointless.. land appreciates not homes.. if you take home 175k net sure.. if not, ill hit u w some tough love.. it takes 15 yrs (more really) if you put less than 20% down for your principle to be getting hit more than interest