Converting Primary Residence To A Rental

By Jason Watson, CPA
Posted Saturday, March 21, 2026

This section isn’t as thrilling as others such as acquisition costs or 1031 like-kind exchanges, but at times it is an important consideration. Why would you want to convert your primary residence into a rental property (it is already a real estate investment of sorts, right?)? Here are some reasons-

You have an amazing mortgage interest rate, and don’t want to give it up necessarily. Keep in mind that mortgage interest can put a big dent into the internal rate of return (IRR) on a rental property. A 3% delta on a $400,000 loan is roughly a $1,000 monthly dent in cash flow. So, you need to go from $2,500 in rent to $3,500 just to break-even on the increased mortgage interest (sure, this assumes an early mortgage, and not one that you’ve had for seven years or more, but you get the idea).

You need to move quickly, but this year’s income is insanely high as compared to other years and your house’s gain exceeds the current $500,000 capital gains exclusion. This is a timing problem, right? Perhaps you can wait until next year to sell. You could also grab some cash with a home equity line of credit to tie things over. Cash-out refinance is more of a long-term commitment.

Your primary residence has been flat for a bit, and you suspect that there is a big boom coming to your geographic location. Therefore, you don’t want to sell before the prices start jumping but you also need to move for a job relocation. This allows you to cover your expenses with rental income while you await the wave of price increases on your way to an eventual sale with a nice rate of return.

Moreover, at times other investments in your risk profile are flat and you are concerned about where to park your money. Cash doesn’t seem like a good idea and buying another real estate investment puts you where you are today with a new data set of unknowns.

Perhaps your move is temporary. You are taking several years off to travel, visit the grandchildren, and drive your own children nuts. Why not? They drove you nuts, right? Parents forgive but never forget. However, your home is in a good location, has sentimental value and you plan to return later.

Rental properties can be tough to get into. Borrowing costs and underwriting guidelines can be more onerous when the property is not owner-occupied. Fortunately, the rental property investment landscape has favorably shifted towards traditional mortgage borrowing. However, and as many people in the military will tell you, moving from home to home, and converting prior properties into rentals can help accelerate your real estate acquisitions. Just a wake of homes converted into rentals- love it!

The OBBBA Bonus Depreciation Trap

If you are converting a home you purchased years ago into a rental property today, beware of a massive depreciation trap. Under the One Big Beautiful Bill Act (OBBBA), the permanent 100% bonus depreciation rate only applies to assets acquired and placed in service after January 19, 2025.

Because you originally acquired your primary residence prior to that line in the sand, the property fails the post-January 19, 2025 acquisition requirement under OBBBA. Even though used property can qualify for bonus depreciation under current law, the statute still requires that the taxpayer acquire the property after the legislative cutoff date. As a result, the property’s existing components that are later identified as IRC Section 1245 property from a cost segregation study are disqualified from the new 100% bonus depreciation rate. Bummer!

Instead, they are stuck with the much lower, original phase-down rates (such as 40% for property placed in service in 2025). However, any brand-new assets you purchase specifically for the rental after the conversion (like new appliances or fencing) will qualify for the full 100% because their acquisition date falls after the legislative cutoff.

The Section 121 Entity Shuffle

Inevitably, a clever investor will ask: “What if I sell my primary residence to my own S Corp or LLC? I can claim the IRC Section 121 exclusion (which allows married couples to exclude up to $500,000 of capital gains tax-free), give my entity a stepped-up basis, and claim 100% bonus depreciation as a new acquisition under OBBBA!”

It sounds brilliant, but the IRS built a brick wall for this exact maneuver. To qualify for bonus depreciation under IRC Section 168(k), the property must be acquired by “purchase.” IRC Section 179(d)(2) defines a purchase and explicitly excludes property acquired from a related party under IRC Section 267.

If you or your family own more than 50% of the buying entity, you are a related party, and the transaction fails the purchase definition. The entity gets zero bonus depreciation and is stuck with typical depreciation schedules. Yes, you will get the $500,000 tax-free exclusion on the sale, but No, you cannot reset the bonus depreciation clock. This gets tricky and carries risk.

Other Converting Your Home Into A Rental Considerations

A few things to keep in mind as you look to convert your home into a rental-

• According to Treasury Regulations 1.168(i)-4(b), your depreciable basis is either the adjusted basis on the date of conversion (what you paid for it) or the fair market value, whichever is lower. We’ll say it again, whichever is lower. Therefore, it does not matter that your property has increased in value.

• There is some tax arbitrage potential here, however. Let’s say your property is going to decrease in value for whatever reason. Losses on primary residences are not tax deductible. However, if you convert your home into a rental property, and it continues to decline in value, then at the point of future sale you might have a tax-deductible loss.

• If you plan to incur major renovation or remodeling costs, these expenditures should be made after the property has been placed into service (available for rent). This might allow for a higher depreciable basis of the rental property and increase your depreciation expense (partial asset disposition might come into play, which we discuss later). However, an argument could be made that your original purchase price plus the renovation becomes the combined adjusted basis. More discussion required,

Augusta Rule When Converting To Rental

This headline is a little misleading since the words Augusta rule and rental property are not typically mentioned in the same sentence. Why? IRC Section 280A(g) generally allows you to rent your primary residence to others for 14 days or less tax-free.

As such, could you rent your primary residence for 14 days, move out and then convert it to a rental property? Sure. Seems like a lot of work paired with a bunch of risk, but it is certainly possible. Keep in mind that if your facts are slightly flipped around where you move out of your primary residence and move into another home, and then attempt to claim the Augusta rule and grab 14 days of tax-free rental income, then the gig is up.

When does your primary residence no longer serve that purpose or fit that definition? It’s an abstract question, but the answer must prove your intent that during the 14 days of rental activity, you still viewed the property as your personal home.

We point this out only to illustrate that WCG CPAs & Advisors is turning over very rock when exploring all tax deductions and arbitrage when it comes to rental properties and real estate investments. Even the crazy and half-baked rocks. That doesn’t make any sense, does it? Half-baked rocks. Oh well.

The most important thing above all is to not visit your rental property. Some kidding aside, if this was your home where you raised children and manicured the lawn, it will be a gut punch on how others maintain your “business property.”