Are you considering converting your second home into your primary residence? Whether it's a cabin in the mountains or a beachside retreat, there are a few important factors to consider before making the switch. In this blog post, we will discuss what you need to know about converting a second home into your primary residence.
Conversion Strategies
To qualify as a primary home, the taxpayer must have owned and lived in the home for two years during the five-year period ending on the date of sale. (However, the qualification period is extended to 10 years for military and foreign service personnel who have foreign assignments) A gain of up to $250,000 ($500,000 for joint returns) on the sale of a personal residence may be excluded from taxable income. Joint owners who are not married may each exclude up to $250,000 of gain. This exclusion may be claimed repeatedly but only every two years.
A strategy for converting a rental home to a retirement residence is to purchase a second home and using the rental income to offset as much of the mortgage and expense as possible. When the owner is ready to retire, the primary home may be sold and the proceeds used to refurbish the rental home, which then becomes the owner’s retirement residence. Or, the owner may sell both the primary and second home and use the proceeds to purchase a new home.
Mortgage and Insurance
If you currently have a mortgage on your second home, you will need to contact your lender to discuss the conversion to a primary residence. Depending on your mortgage terms, you may need to refinance or update your loan agreement. Additionally, inform your insurance provider about the change to ensure your coverage aligns with the new status of your property.
Residency Requirements
Some areas have specific residency requirements for primary residences, such as minimum days spent in the home per year. Research local regulations to ensure you comply with any residency criteria in your area. Also, know and understand the ‘14 Day Rule’ when it comes to 2nd homes and vacation properties.
Lifestyle Adjustment
Converting a second home to a primary residence will bring about a significant lifestyle adjustment. Consider factors such as proximity to schools, workplaces, healthcare facilities, and amenities when evaluating the suitability of the property as your primary residence.
Financial Considerations
Changing your second home to your primary residence may have financial implications beyond property taxes. Consider the impact on your overall budget, including potential changes in commuting costs, potential loss of rental income, and any necessary renovations or upgrades.
Legal and Tax Implications
Consult with legal and tax professionals to understand the legal and tax implications of converting your second home to a primary residence. They can provide guidance on any legal requirements, permits, or tax considerations you need to be aware of.
Final Thoughts
Converting a second home to a primary residence can be an exciting and rewarding decision. However, it requires careful consideration of various factors, including property taxes, mortgages, insurance, residency requirements, utilities, lifestyle adjustments, and financial and legal implications. By conducting thorough research and seeking professional advice, you can make an informed decision that aligns with your goals and ensures a smooth transition to your new primary residence.
