When a Principal Residence Becomes a Rental Property
If you own a rental property, you may be wondering if you’re required to pay taxes on the rental income. The answer depends on how long you’ve owned the property and whether or not you live in it.
If you own a rental property that you’ve never lived in, then any rental income is subject to capital gains taxes. However, if you’ve owned the rental property for less than a year, you may be eligible for a capital gains tax exclusion.
If you own a rental property that you previously lived in as your principal residence, then the rental income is subject to different tax rules. Generally, you can exclude up to $250,000 of capital gain from the sale of your home, or up to $500,000 if you’re married and file a joint return. However, this exclusion only applies if you’ve owned and lived in the home for at least two of the past five years.
If you don’t meet the ownership and occupancy requirements, then you may still be able to exclude a portion of the capital gain from taxes. This is known as partial exclusion, and it’s available if you sell your home due to a job change, health reasons, or other unforeseen circumstances.
When it comes to rental property taxes, it’s important to consult with a tax advisor to ensure that you’re properly reporting your income and expenses. This will help you maximize your deductions and minimize your tax liability.
What is a Principal Residence?
A principal residence is a property that an individual owns and lives in as their primary home. This can be a single-family home, a condo, a townhouse, or even a boat or RV. As long as an individual lives in the property as their primary home, it can be considered a principal residence.
There are a few key tax benefits that come with owning one of these. First, the profits from selling a principal residence are typically exempt from capital gains taxes. This is known as the primary residence exemption. Additionally, mortgage interest and property taxes are typically deductible if they’re paid on a principal residence.
However, it’s important to note that a property can only be considered a principal residence if it is owned and lived in by the same individual. If a property is rented out or used as an investment property, it does not qualify for the primary residence exemption.
If you had any further questions or would like to know more about how you can start renting out your principal home as a rental property call or email us at BBS Bookkeeping Services today!