Turn a personal residence into a tax shelter — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily

Turn a personal residence into a tax shelter

Get PDF file

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Say you bought your home when prices in your neighborhood were sky-high, and now you’re trying to sell it. Unfortunately, there’s no tax break for a home sold at a loss.  

Strategy: Convert the home into a rental property. If home prices in your area rebound, you can sell the home and pocket a gain. In the meantime, you can benefit from some relatively generous tax breaks for rental properties.

Notably, you can write off expenses against rental income, such as mortgage interest and property taxes, just like you can with any other rental property. Plus, you’re entitled to a generous depreciation deduction based on a cost recovery period of 27.5 years. Those expenses should be able to offset much, if not all, of the rental income for tax purposes.

Furthermore, if you end up selling the home at a loss, the loss may be deductible against your other taxable income. However, be aware that your tax basis for gain or loss purposes is reduced by the depreciation deductions claimed during the rental period.  Thus, your loss could eventually turn into a taxable gain if you keep renting the property long enough.

For a personal residence that is converted into a rental property, your initial basis cannot exceed the property’s fair market value (FMV) on the date of the conversion. Since we’re talking about a home that has declined in value, it’s likely you’ll be using the FMV on the conversion date. This reduces the potential for a deductible loss when the property is eventually sold.

Of course, your property could continue to decline in value or have a negative cash flow while you’re treating it as a rental property. If this is a strong possibility, think twice about converting the property, even if you will benefit from annual write-offs of rental expenses and a future deductible loss. It may be best to simply get out now.

Tip: If you do convert, rent out the place for more than two years to meet IRS guidelines for converting a former principal residence into a rental property.

Leave a Comment

 

Previous post:

Next post: