Switching primary residence to rental property

[Brian Heimerdinger]

Hi guys, was wondering if there are any issues switching over a primary residence to a rental. I currently own a place and am looking to switch it over to rental, and buy a new primary. Does this void the mortgage? Or have any ramifications? As long as I claim it on taxes and get the right insurance it is legal correct?

[Ana Garcia]

@Diana M. The IRS does not require you to have a business entity set up. If you use your cellphone, the Internet, a space in your house where you work on your real estate, and maybe even purchase a laptop to use for your real estate activity, etc. all these are allowable expenses. What you do is you prorate the usage according to how much time you spend working on real estate vs. other activities and that is what you would report for tax purposes.

The gain exclusion is on the sale of your home. You must use the property as your principal residence for a total of two years, not necessarily consecutive, out of the five years preceding the sale in order to avoid paying taxes on the gain (up to $250,000 for individuals or $500,000 if married filing jointly). 

1031 exchanges apply to investment (rental) properties. In a 1031 exchange you are purchasing a new investment property after having sold another. There are other rules (i.e., you must close within 6 months) that apply to a 1031 exchange.

Hope this helps,

-Ana