With many homes on the market in the Colorado Springs area, some sellers consider renting out their property if they cannot sell it within a specified amount of time. Converting your property into a rental may not be a bad idea but you need to understand the pros and cons that are involved.
I advise homeowners to gain professional advice from their accountant before making the decision to rent out their home.
Tax write-offs for personal property and rentals are different. When you sell a rental property, you are required to pay taxes on capital gains unless you choose to perform a 1031 exchange. When you sell a home that has been your primary residence for at least two out of the past five years, you have a $250,000 ($500,000 for those filing jointly) capital gains exemption. In other words, you do not have to pay taxes on capital gains within the allotted amounts. There are tax benefits with rentals (i.e. depreciation, interest, taxes, insurance, and expenses) but the tax advantages are different when compared to owning the property as one’s primary residence.
To avoid any surprises when considering converting your property into a rental, do your research and understand that when you decide to rent out a property, the tax rules are different. The IRS will view the property you own differently when it is a rental because it may be income producing or in other words a business related.