Converted My Primary into a Rental Property - Second Guessing That Decision

[Dane Reynolds]

In October of last year I moved out of my home of 15 years in Austin and converted it into a rental property.

I originally paid $143k for the home, it's worth roughly $368k today.  It rented out at $2,100/mo as of Dec 2023. 

My current understanding is that if I keep it a rental for more than 3 years, I will be subject to the capital gains taxes on the $225k difference. 

I will avoid this $37,250 tax bill if I sell it now (I believe it's taxed at 15%).

It was my intention to hold this property for a very long time (10+ years) as Austin was been appreciating nicely, and it's cash flowing at ~$750/mo.

I don't plan to buy any additional properties at the moment. 

Making the right call here, or should I sell it?

[Ashish Acharya]

Hi Dane,

You can sell now and seize the opportunity the primary residence exclusion from capital gains tax offers. But don't do it hastily. You have another three years to sell and still meet the requirements to exclude gains under Section 121.

If you decide to hold the property and relax with a continued market appreciation and cash flow, three years of future appreciation is a gain that can be excluded when you sell within that time window.

Because of Austin's powerful appreciation and positive cash flow, it might be better to hold the property long-term. If you desire to keep the property after three years of moving out, you can sell it to your controlled corp, and you will still be qualified for the $500,000 gain exclusion. In that respect, you will have achieved a higher basis for depreciation and exclude the gain. This strategy should be discussed with your tax advisor in detail.