Over the years, many clients have asked me if they can convert an investment property or a rental house into their personal residence. The answer is yes, if you follow the guidelines.
Let me start by stating that I am not a tax adviser but a real estate broker. Please do not take this information as advice and buy your dream home. Talk to your tax accountant and a 1031 tax-deferred exchange intermediary who can guide you through a transaction and inform you of the tax consequences.
If you own an investment property, you could sell it, take the cash and later purchase your new residence, but you will pay taxes. You will most likely end up paying capital gains tax, depreciation recapture, and possibly the 3.8% investment tax.
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If your investment property is a single-family house, you could move in and change the utilities into your name, using the property address for all your mail.
The converted property would no longer be reported on your 1040 Schedule E (or through a K-1 for a pass-through entity) but your Schedule A. Your Schedule A is where you report your property tax and mortgage interest deductions.
Your mortgage lender may have issues if you are changing the property’s use or the title from an entity to your name. Likewise, the county tax assessor will scrutinize the title transfer.
If the title is in an entity and it is changed to individuals, those individuals need to be the same owners of the entity. If they are not the same, you may have transfer tax to pay.
You could perform a 1031 exchange
If you own a small commercial strip center, for example, you could perform a 1031 tax-deferred exchange into a single-family house you rent to a tenant.
To satisfy the requirements of a 1031 tax-deferred exchange, the replacement property must be used for investment purposes to qualify as a “like-kind” exchange. “Like-kind” is more about the tax status (investment or personal) rather than the type of property.
Your initial intent of the exchange needs to be for investment purposes. You intend to rent the house at market value to a third party. There is no precise time to rent the property, but my understanding is that a two-year minimum is safe.
You are exchanging an investment property for your dream home; moving into it shortly after constitutes fraud. Or, keeping the house vacant for 18 months, never attempting to market for rent, securing a tenant, or showing income will undoubtedly be a red flag with the tax authorities.
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You should have documentation of your intention to rent the house, including emails to your accountant and intermediary. Having a lease and showing investment income will solidify your intentions.
Having emails to your broker, accountant, or intermediary telling of your intentions to move in the day after closing will undoubtedly solidify your intentions as well. However, it is legal to choose later to update your intentions and move into the house, but be sure you document a legitimate reason.
You may save taxes by strategically moving into a rental house you own or exchanging into your dream home; be sure you follow the guidelines and timing in doing so.
Remember that if you had a prior exchange, you could end up paying taxes from that event when you or your estate sells the replacement house.
Burt M. Polson is the CEO of ACRESinfo.com, a commercial real estate brokerage company, and CEO of StoneMarkerInvestments.com, a private equity real estate fund. Info: 707-254-8000, [email protected], [email protected].
5 vehicles that are easy on the wallet
Those who can’t stretch all the way to $20,000 but want a new, reliable and fuel-efficient vehicle should consider the 2022 Nissan Versa. Despite its small footprint, the Versa offers excellent passenger space and a roomy trunk. Driving aids like forward collision warning and lane departure warning come standard. Nissan’s Zero Gravity seats are ergonomically friendly, though a few of our editors found they lacked lumbar support.
The Versa feels well built and can even be entertaining to drive — just don’t expect much in the way of acceleration. In addition to a price tag that leaves room for options, Versa buyers will save at the pump with an EPA estimate of 35 mpg combined. (We averaged 41 mpg on our evaluation route.)
Want a more practical shape? The 2023 Kia Soul is one of a handful of inexpensive and well-reviewed hatchbacks on sale. With car-like handling and SUV-like interior dimensions, the Soul is broadly appealing. A standard 2.0-liter engine is peppy for around-town driving, though passing maneuvers require some forethought. The continuously variable transmission mimics automatic gear changes, eliminating the usual droning noise. Handling is on par with sportier competitors thanks to balanced steering and controlled body motions.
The Soul’s boxy exterior allows for easy entry and exit, plus generous headroom for passengers. Standard Apple CarPlay and Android Auto are accessed via an easy-to-use touchscreen. The EPA puts its fuel economy at 30 combined mpg, though we only managed 26.8 mpg in our testing.
The line between a hatchback and SUV can sometimes be faint, and the front-wheel-drive-only Hyundai Venue is caught in between. Though it offers ground clearance comparable to other small SUVs, the Venue lacks all-wheel drive as an option. Still, with a price tag just north of $20,000, the Venue is among the cheapest ways to sneak into the most popular segment.
An 8-inch touchscreen with Apple CarPlay, Android Auto and navigation is standard and easy to operate. Given its micro size, the Venue has impressive passenger and cargo space. Seat and ride comfort is excellent for the segment, and power is adequate. The EPA rates the 2022 Venue at 31 combined mpg, but we averaged 29 mpg in our driving loop.
Just because affordable sedans are primarily front-wheel-drive doesn’t mean all-wheel drive is unattainable. The 2022 Subaru Impreza is the least expensive way to get the all-weather assurance of all-wheel drive in a sedan or hatchback. With a comfortable, spacious cabin and intuitive technology, the Impreza treats passengers well.
Steering and handling is solid, though lackluster acceleration and a droning CVT bring down the driving experience. Standard driving aids like adaptive cruise control, blind-spot monitoring, and lane keeping assist bundle convenience and confidence. The EPA estimates CVT-equipped Impreza sedans will get 32 mpg in combined city/highway driving. Unfortunately, we struggled to average even 28 mpg.
When hatchback or small SUV practicality isn’t enough, shoppers can turn to small pickups like the Ford Maverick. After falling out of fashion for a while, these light-duty compact trucks are back to offer an affordable alternative for DIY-ers. The Maverick’s clever interior storage and a 4.5-foot bed offer versatility, while a standard hybrid powertrain vaults its EPA estimates to 37 combined mpg.
That’s better mpg than even the most frugal compact sedans, plus you get a rugged pickup style, stellar passenger space and crossover-like maneuverability. Ride quality is a tad choppy, and hard plastic panels can bump uncomfortably against your knees, but the Maverick’s low pricing and utility may help offset the cons. Take note that all 2022 model year Mavericks are sold out, but Ford has started taking orders for 2023 vehicles.
Note that these inexpensive prices are for the base models, which might not be carried by dealerships in the current market. You might need to plan ahead and order the vehicle if need be.
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