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Rental Property That Becomes Your Residence

Submitted by spillane56@veri... on 25 November 2008 - 12:12pm

How does one enter the following scenario: You purchase a rental property this year and rent it out for 5 years. Assume there will be a mortgage on the rental property. In 5 years, you sell your personal residence and move into the rental property (making the rental your personal residence). Some of the proceeds from the sale of your home are used to pay off the mortgage on the rental property.

Can this be done using only the Housing folder (primary home and/or vacation home tabs) and the Real Estate folder? Or am I stuck doing some side calculations and then entering some of the information in the Special folder?

I can visualize the timing and sequence of the various cash inflows and outflows, but I'm not quite sure about the best way to enter this information. I'd hate to enter everything as special receipts and special expenditures if there is a simple way to do it iusing only the housing and real estate folders.

Thanks,

Rick

‹ Apartment in Primary Home: Reflect as Special Expenditure or as Property? Renting out your home, tax law changes ›
Submitted by Laurence Kotlikoff on 8 February 2009 - 9:12pm.
1

I'd treat the rental property as your primary home that you own (enter the downpayment as a special expense). Enter the rental income for the next five years as a special receipt. Enter the current home you are living in as a vacation home and sell it in five years. Call me with further questions at 617 834-2148. best, Larry

Submitted by d.reynolds@knol... on 26 June 2009 - 8:10pm.
2

I also modeled a scenario like this and used the technique described by Larry. However, I believe there's one more problem to solve. ESP will calculate your taxes with a mortgage interest deduction if you enter your rental property as your primary home. Of course, you can't claim it until it is your primary residence. To fix this, I added some special receipts, taxable at ordinary rate, in the amount of the interest I expected to pay each of the years the home was a rental. I then zero'd out this change in income by entering matching special expenditures, that are not tax related.

Are there any tax experts out there who see a mistake in this thinking?

Submitted by Dick Munroe on 27 June 2009 - 1:42am.
3

I would do it a little differently.

1. You have your current primary home, enter it.

2. You sell your current primary home in 5 years and buy a new primary home (your rental property) using whatever values have been calculated for your rental property mortgage, appreciation, etc.

3. You sell your current rental property so that you wash the mortgage (if any).

You may have to be clever about the numbers you enter to get everything to balance out with no net gain on the rental property, but I think this does the right thing internally for all the tax calculations and will reduce the number of side calculations dramatically.

Best,

Dick Munroe

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