Designating your home as your principal residence comes with some great tax advantages at least for now. So, if you sell your home and realize a capital gain on sale, a single person can avoid tax on $250,000 of gain. A married couple can avoid tax on $500,000 of gain. If you have owned your home a long time, it is very possible that you could see a major gain on sale in various markets where prices have risen dramatically.
However, before turning your principal residence into a rental property, talk to your accountant to discuss the tax treatment. Once you start earning rental income and taking depreciation on the property and various write-off's, you may jeopardize that capital gains tax treatment that comes from designating your home as your principal residence. In order to get back on track, you must move back into your home for two years before selling to take advantage of the tax free gain. But again, talk to your accountant before you take these steps.
And, keep watching the news. President Biden is intent on raising taxes in 2022. If it happens, there could be an impact on capital gains treatment that could change this entire discussion. Never give up tax free income if at all possible.
