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Should we convert our condo to a rental?

December 8, 2003


Subject:  Changing our primary residence to rental property
From:  Allison
Date:  Mon, 10 Nov 2003

My husband and I purchased a condo in September. We intend to fix it up over the next year while we live in it, and at the end of 2004 or the beginning of 2005 we were planning to purchase a second property for our principal residence and to rent out the condo that we bought this year.

Do we need to live in the property longer before purchasing an additional home in order to avoid tax on the capital gain? Also, do you have a percentage of what the capital gains tax would be for the above scenario, and does the percentage come off the assessed value of the property if it is not being sold but used as an investment? Finally, are there any other taxes that we need to be made aware of in doing this?

Answer

Date:  Mon, 01 Dec 2003

Hello Allison,

Rather than get into a long, drawn out answer, here is an observation and a recommendation. Since you are planning on living in the property as you fix it up, I think it's best for you to live in it until you qualify for the exclusion for the sale of a principal residence. That's more than two years. Then you can sell the condo and exclude up to $500,000 of gain. If you convert the property to a rental in a year, you will lose the exclusion.

If you are serious about investing in real estate, find a good tax advisor to work with.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

Should we convert our condo to a rental?

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