Tax Implications of Primary Residence vs Investment Property

[Jinyu Shao]

Hi all, I own a duplex in Queens and our family both live and rent the property. My family is planning to move out of the neighborhood and rent out the entire building. 

I'm unsure whether the house will become an investment property after we move out or remain a primary residence. We've been living there for almost 3 years. I'm aware there are rules like the 2/5 rule, you have to live there for 2 years in the past 5 years for it to be considered a primary. I'm not sure if it has changed. 

Any insights on the tax implications of primary residence vs. investment would be helpful.

Thanks!

Jinyu

[Dave Foster]

@Jinyu Shao, I'm a 1031 guy and have to choke when I say this - "Always take the 121 exemption every chance you get.  Tax free is is always better than deferred - even if you start right back over buying another investment property.  It's a gambling term called ratholing.  You're getting money off the table and out of harms way completely.

Secondly, although depreciation is a cool concept.  The fact that it has to get paid back upon sale eliminates most long term benefit to it (unless you do a 1031 or die holding the asset).  So if you can invest equally with equal results I'd always go the 121 route.  But you're limited to one of those every two years.  So in between you build up a rental portfolio which you alternatively 1031 and convert into primary residences once in a while to once again take advantage of at least a partial 121 exemption.

This is the greatest gig going for rei!  And in your case you get the full benefit first time in the game.  Hold that property and rent both sides for 3 more years (be careful with dates) and if it's not the best rental ever sell it and take 50% of the gain tax free (up to $250K if single or $500K if married).  And do a 1031 on the rest.  Best of both worlds!