Renting own residence

I bought a home 3 years ago. Instead of selling I want to rent it out. Is there any restrictions on this. Because I remember signing something when I bought the house that it would be my personal residence…but now that I’m going to rent it out, is there penalties or somthing like that? Also, how does insurance work. Is there a different type of insurance that I have to pay, and in addition, the people with me still have to buy their own renters insurance right?

Please let me know about these two questions

Can I rent out my own home? and
What type of insurance is needed?

Thanks in advanced

Unless your lender made specific guidelines forbidding you to ever rent your home (doubtful), then yes, you can probably rent your personal res. If you’re not sure of this, consult with your attorney.

More than likely, you would want to switch your insurance to a landlord’s policy or state’s equiv. of. Confer with your insurance company to know for sure.

Why would you want to rent your personal residence? You are potentially losing a goldmine in taxfree savings by converting your personal residence to a rental. I’d suggest that you confer with your tax advisor before committing to it.


Well, the reason is because I recently got laid off. And I won’t be able to afford the house that I am in…I don’t think. I don’t want to mess up my credit and have late payments on it. It’s a 3bd and there is only me. So I thought, well, maybe it would be good to rent the house out, enough to pay the mortgage, rent out a studio for myself close to school, and I can go back to school to finish off my degree…so that I may get a better paying job again, in something that I love.

Well, I don’t have a lawyer, but I will talk to someone about it. And I’ll also talk to my insurance agent. Thanks for the help.

 Like Roger said, review your closing documents with a fine tooth comb or get a lawyer, but if you live in a residence for six months, even if you got an owner occupant loan, you should still be able to rent it out no problem.
 Especially in light of losing your source of income.  The lender would be dumb to try to find you in breach of contract if you had a life changing event (loss of job).
 Furthermore, if the lender is gettng their money, they will have no reason to question you.
 I have personally created a superior income to expense ratio by renting my personal residence to a tenant, and renting an apartment for myself.  Roger's right.  You'll take a tax hit.
 You are going to be an investor by default if you do not take this lightly.  Either get a good property manager (and how will you know a good one from a bad one?) or manage the property yourself.
 If you manage the property yourself, educate yourself with regard to forms and methods of good property managers.
 A good place to start would be the National Apartment Assciation or the California Apartment Association.  I would imagine that you could become a member of one, the other, or both no matter where you live.  These organizations can give you the forms and direction that you need to get started as a small property manager.
 Usually the cost of insurance is about the same, but you should get a landlord hazard policy instead of a homeowner policy.

Thanks for your help. I went through my docs and I don’t see anything there about penalties or not renting out my home, or a timeline before I can. Either way, I have a meeting to meet my lender tomorrow and see what he has to say.
Even though I’ll take a tax hit, perhaps the fact that I don’t have much income comming in will help to balance what I do owe in taxes to the gov. As of this point, I feel positive in the fact that this is what is best for me considering the situation. thanks

I’m not sure what kind of tax hit those other people were talking about. The only major one is the fact that if you’ve lived in the property for two of the last five years and you sell it, you get to keep up to 250k worth of gain tax free, 500k if married. Sounds like you meet that requirement. Now in certain areas there hasn’t been much appreciation so this may actually be a moot point.

There are also tax savings to renting out a property, basically you can still deduct everything. Even better is that stuff that wasn’t deductible is now deductible such as repairs to the property. You can deduct the interest against the income and I think you’ll also be able to take a depreciation deduction. Again you’ll have to check with you accountant to see how it all adds up.

Lastly, what’s the rent going to be and what’s the mortgage? Typically the rent isn’t enough to cover the mortgage let alone taxes and insurance in a single family but your market might be different.

As for insurance, you probably have a owner occupied policy and you’ll probably want to convert that to a fire and dwelling policy. Those are usually a little bit more as there’s more risk when a property isn’t owner occupied.

You probably won’t have any issues with the lender, usually they just like that you live in there for at least a year, but there’s no real way they can compel you to live in a place you don’t want to. That’s why there’s lots of owner occupied loans that are actually made out to investors and hence it’s tough to figure out exactly how many units are actually owned by investors instead of owners.

I’m not sure what kind of tax hit those other people were talking about. Losing your ability to sell a house tax free (up to the $250/$500K mark) is pretty major tax right. You even agree, according to your post.

Choosing to use it as a rental rather than selling could be the worst possible decision. Even if he would still meet the criteria down the road for the tax free sale, the process of renting the home, and taking deductions for such, still have to be considered when selling. Doing that largely counters the tax-free sale, as depreciation recapture is much more expensive than simply taking a capital gains tax hit. Exactly why he should seek more professional local help than posting a question on an open forum.

Also to consider, renting out to “cover the mortgage” actually means you are in negative cashflow situation. For someone that has just be laid off, I’d say that isn’t the best situation to be in. What happens if the renter vacates the property? What happens if they trash the property? Is there funds to cover this?

You should think long and hard about this before committing to ANY one way. Make the wrong decision today and you could be messed up for a long time.



According to the original post, mac82 has lived in this property as his primary residence for the past three years. If he converts it to a rental now, he still qualifies for the capital gains exclusion for the next three years. Converting to a rental does not automatically disqualify mac82 from potentially selling tax free.

After three years of rental use, then mac82’s property is no longer a primary residence and any subsequent sale would be the sale of investment property.

 Upon moving from a primary residence, that you are purchasing, you lose the ability to write off mortgage interest as an itemized deduction.  You will be able to depreciate the property, but your income will go up because of rental revenue.
 The limits of what you could write off, in terms of maintenance and repairs are higher if your income is lower, but this just translates into expenses during the year (as the cost of the maintenance.)
 I agree with henryinma that the most relevant tax consequence is a good break if mac82 decides to sell, but this is assuming that there has been mortgage paydown or appreciation.

This is where you need to check with an accountant. As far as I’m aware, you will still be able to write off the mortgage interest as a business expense so it’s not that big a hit.

As for recapture, I guess it depends on what income tax bracket he was in. If it was higher than 25%, he would probably make out as I believe recapture is taxed at 25%. If laid off for an extended period of time, I’d agree that the recapture isn’t worth it, but as it’s automatic, he’d probably have to take the depreciation anyway.

Also as it applies to the last five years, there’s a possibility that he could rent it out for four years, move back in for a year, and then sell it after the year is up. Or for that matter rent it out for 10 years, move into it for two years and then sell it. I believe there’s tough rules about converting a rental back into a primary residence if you’re doing a 1031 exchange, but in this case, it’s probably ok.

I’d also have to agree that we really need more information as he didn’t mention what the rents are in the area and what the carrying costs would be. If he were in my area, anyone who bought a home 3 years ago probably doesn’t have a low enough mortgage to make it cashflow as a rental unless they put down more than 20% in which case it’s just a poor use of capital.

As always all this information should be verified by your accountant.

alright, wow, I guess I’m more lost than I thought I could be. Are you guys talking about many different taxes here. Because it seems to be jumping all over the place. What exactly are the types of taxes you are talking about. I guess I just want to be somewhat knowledgable when I go see an accountant. Also, are there accountants that speciallize in investments…or should I go to my regular one. Remember I don’t own any investment properties…so i’m very new to this, like I don’t know what you mean by recapture. Also, you are talking about restrictions on when I return to my home, how many years I have to live there before selling…which i don’t fully understand. Should I talk to my lender about this, or the accountant? I just met my lender and he said I could rent it out, that there are no resitrictions on that. Ok, please clarify it all a little bit more, so went I go and talk to someone, I know which I direction to head toward. Thank you all for your help.

Give us some concrete numbers and we can help you out some more.

For instance, what did you buy the house at? 250k? What do you think it’s worth now? 300k? How much is your mortgage? How much are your taxes? Insurance?

This discussion could be moot if you provide those numbers and it may become suddenly very clear that it may not be a good idea to rent out the property.

For instance if it was worth 300k and you only paid $250k, if you were to sell it over three years later for say 320k, then you don’t get any capital gains tax deduction and you would have to pay taxes on the 70k gain in value. Now if you lived in the property for 2 of the last 5 years, you would have that deduction. It doesn’t have to be a continuous period so you could move out for a year, rent it out, then move back in a year or two later as long as it added up to two years in the last 5.

Recapture refers to the depreciation you can take on a rental property but you don’t get that with a primary residence. You only depreciate the property not the land, so if the house is worth 200k and the land is 50k, you only depreciate the 200k. It’s based on 27.5 years so 200k would give you a $7272 deduction on your taxes per year. Now if you sell the property and it in fact appreciated instead of depreciate, you would have to pay taxes on that deduction you took because it didn’t really depreciate and that’s called recapture. That rate is 25%, if your tax rate is higher than that, then you still get slightly ahead. However if you’re unemployed for a while, you’ll probably be in a lower tax bracket and it would hurt you to pay a higher tax rate when you could only the deduction on a lower tax rate.

You don’t really need to talk to your lender anymore, all this you can go over with your accountant.

[quote author=Roger J You are potentially losing a goldmine in taxfree savings by converting your personal residence to a rental. I’d suggest that you confer with your tax advisor before committing to it.

Boy, as a CPA who serves a number of newbie real estate investors, I second this bit of advice from Roger. All you need to do to lose the Sec. 121 exclusion is not pay attention to this for a couple of years and then find it takes a year and a day to sell your house. At that point, you don’t meet the 2 years occupany in the last five years rule. And your tax rate goes from 0% on the appreciation to 15%.

If you have appreciation, it really makes more sense (tax wise) to sell the house, take the gain tax free, and then buy the identical house on the next street. Of course, do consider transaction costs…

In general it is harder to make money turning your primary residence into a rental. The attributes that are going to make a property a successful rental is not usually considered when you bought your primary residence. For instance your primary residence is usually larger than the prevailing rentals and thus must rent for a higher amount. This can mean that there are drastically fewer people willing and able to rent at that price point.

If I lose my job and can’t afford my primary residence anymore I would sell it and downsize my life and expenses.

Ok, I bought the home at $325000 it’s worth about $372000. Taxes are about $1850/yr, and Ins is $1400/yr and mortgage is $2,022.62.

Also, if the senerio is my daughter and her two friends moving in, would that change the situation in whether or not renting the place is a bad idea. I’m thinking I can get $850 each per month. This is just an idea, this is if she can get out of her lease.

Please let me know your thoughts.

How are you getting -$600?

If I’m getting $2550 in rent
minus mortgage $2293.49
minus $154.17 (taxes)
minus $116.70 (ins)
equals $256.51

again, how are you getting to -$600?

My bad, I didn’t see “two friends”. I thought it was only your daughter and one friend. :anon

You need to figure out your exit and your strategy. If you want to realize appreciation and your appreciation in your area is good then keep it . Take an equity line out and use that cash to leverage another deal. If you plan on selling it soon. Sell it and forget about renting.