As a savvy investor, you’re likely no stranger to the world of real estate investing. You’ve done your research, crunched the numbers, and finally found the perfect investment property. But have you ever stopped to think about the possibility of living in that property yourself? It may seem like a dream come true – no rent payments, no landlord to answer to, and the freedom to make changes to the property as you see fit. But is it really the right move for you?
The Benefits of Living in Your Investment Property
Before we dive into the potential drawbacks, let’s take a look at some of the benefits of living in your investment property.
No Rent Payments
The most obvious advantage is the lack of rent payments. By living in your investment property, you’ll no longer have to worry about writing a check to a landlord each month. This can be a huge cost savings, especially in areas with high rent prices. And let’s be real – who doesn’t love the idea of keeping that money in their own pocket?
control and Customization
When you live in your investment property, you have complete control over the space. Want to knock down a wall to create an open-concept living area? Go for it. Want to install new appliances or renovate the bathroom? It’s your call. You’re not beholden to a landlord’s rules and regulations, so you can make the changes that will make the property truly yours.
Potential Tax Benefits
Depending on the specific laws in your area, you may be able to take advantage of certain tax benefits by living in your investment property. For example, you may be able to deduct a portion of your mortgage interest and property taxes on your personal income tax return. This can add up to significant savings over time.
The Drawbacks of Living in Your Investment Property
While there are certainly some benefits to living in your investment property, there are also some potential drawbacks to consider.
Blurred Lines Between Personal and Investment Use
When you live in your investment property, it can be easy to blur the lines between personal and investment use. This can make it difficult to accurately track expenses and calculate your return on investment (ROI). And come tax time, you’ll need to be able to separate personal expenses from investment expenses to take advantage of those tax benefits we mentioned earlier.
Emotional Attachment
As an investor, it’s essential to maintain a level head and make decisions based on logic and reason. But when you live in your investment property, it’s easy to become emotionally attached to the space. This can make it difficult to make objective decisions about the property, such as when to sell or renovate.
Liability Concerns
As a homeowner, you’re liable for any accidents or injuries that occur on your property. This can be a major concern, especially if you’re planning to rent out a portion of the property or allow others to use it. You’ll need to make sure you have adequate insurance coverage to protect yourself in case of an accident.
Potential Resale Value Impacts
When you live in your investment property, you may inadvertently decrease its resale value. This can happen if you make changes to the property that are highly personal or unusual, such as installing a backyard skate ramp or adding a brightly colored accent wall. These changes may appeal to you, but they may not be appealing to potential buyers down the line.
The IRS Weighs In: The 14-Day and 30-Day Rules
The IRS has strict rules about how you can use your investment property, and living in it can affect your tax obligations. Here are two key rules to keep in mind:
The 14-Day Rule
The 14-Day Rule states that if you rent out your property for fewer than 14 days during the year, you don’t have to report the income on your tax return. This can be a convenient loophole if you plan to rent out your property on a short-term basis, such as through Airbnb.
The 30-Day Rule
The 30-Day Rule states that if you rent out your property for more than 30 days during the year, you can deduct rental expenses on your tax return. This can include things like mortgage interest, property taxes, and operating expenses.
Long-Term Consequences: What Happens When You Decide to Sell?
So what happens when you decide to sell your investment property? If you’ve been living in it, you may face some unexpected consequences.
Capital Gains Taxes
If you’ve lived in your investment property for at least two of the past five years, you may be eligible for a capital gains tax exemption. This means you won’t have to pay taxes on the profit you make from selling the property, up to a certain amount ($250,000 for single filers and $500,000 for joint filers).
Depreciation Recapture
But here’s the catch: if you’ve depreciated the property’s value over time, you may be subject to depreciation recapture. This means you’ll have to pay taxes on the amount you depreciated, which can add up quickly.
The Impact on Your Primary Residence Exemption
If you’ve lived in your investment property, you may be ineligible for the primary residence exemption on your next home purchase. This can mean you’ll have to pay taxes on the profit from the sale of your investment property, even if you use that money to buy a new primary residence.
Alternatives to Living in Your Investment Property
So what if you still want to invest in real estate, but you’re not ready to take on the potential drawbacks of living in your investment property? Here are a few alternatives to consider:
House Hacking
House hacking involves living in a multi-unit property and renting out the other units to tenants. This can be a great way to offset your living expenses and still benefit from the investment.
Real Estate Investment Trusts (REITs)
REITs allow you to invest in a diversified portfolio of properties without directly managing them. This can be a great option if you want to invest in real estate without the hands-on approach.
Real Estate Crowdfunding
Real estate crowdfunding platforms allow you to invest in specific properties or projects alongside other investors. This can be a great way to diversify your portfolio and still benefit from the potential returns of real estate investing.
Conclusion
Living in your investment property can be a tempting option, especially if you’re looking to save on rent payments and have more control over the space. But it’s essential to weigh the pros and cons carefully and consider the long-term consequences. By understanding the benefits and drawbacks, as well as the IRS rules and alternative options, you can make an informed decision that’s right for your financial goals.
Remember to always consult with a financial advisor or tax professional before making any major decisions about your investment property. With the right guidance and careful planning, you can make the most of your investment and achieve your financial dreams.
What are the advantages of living in my investment property?
Living in your investment property can provide significant financial benefits. For one, you can save on rent payments, which can be a substantial expense, especially in urban areas. Additionally, you can leverage your investment property to build equity, which can be a valuable asset for future financial goals. By living in your investment property, you can also take advantage of tax deductions on mortgage interest and property taxes.
Furthermore, living in your investment property can also provide a sense of security and stability. As the property owner, you have more control over the property and can make changes to suit your needs and preferences. You can also avoid dealing with landlords and property managers, which can be a significant hassle. Moreover, living in your investment property can also give you a sense of pride and accomplishment, knowing that you own the property and are building equity over time.
Are there any tax implications of living in my investment property?
When you live in your investment property, there are tax implications to consider. For instance, the IRS considers your primary residence as a personal use property, which means you cannot deduct mortgage interest and property taxes as a business expense. However, you can still deduct mortgage interest and property taxes on your primary residence as itemized deductions on your personal tax return.
It’s essential to keep accurate records of your expenses and mortgage payments to ensure you can take advantage of these deductions. Additionally, you may need to consult with a tax professional to ensure you’re meeting the necessary requirements and following the correct procedures. It’s also important to note that if you decide to sell your investment property in the future, you may be subject to capital gains tax on the profit, which can impact your tax situation.
How does living in my investment property affect my insurance coverage?
Living in your investment property can impact your insurance coverage, and it’s essential to review your policies to ensure you have adequate coverage. For instance, homeowner’s insurance typically has more comprehensive coverage compared to landlord insurance, which is designed for rental properties. If you’re living in your investment property, you’ll need to ensure you have a homeowner’s insurance policy that covers your personal belongings and liability.
It’s also important to review the terms of your policy to ensure you’re not violating any conditions. For example, some policies may have restrictions on rental income or require you to notify the insurance company if you’re using the property for business purposes. Failing to disclose this information can lead to policy cancellations or denied claims, so it’s crucial to review your policy carefully and consult with your insurance provider if you’re unsure.
Are there any legal implications of living in my investment property?
Living in your investment property can have legal implications, particularly if you’re planning to rent out the property in the future. For instance, if you’re living in the property as your primary residence, you may not be able to evict yourself as a tenant, which can make it challenging to rent out the property in the future. Additionally, you may need to comply with local landlord-tenant laws, which can vary depending on your location.
It’s essential to review local laws and regulations to ensure you’re meeting the necessary requirements. You may also need to consult with an attorney or real estate expert to ensure you’re aware of any legal implications and can navigate complex situations. Furthermore, it’s crucial to have a clear understanding of your rights and responsibilities as a property owner and tenant to avoid any legal disputes.
How does living in my investment property affect my credit?
Living in your investment property can have both positive and negative impacts on your credit. On the one hand, making timely mortgage payments can help improve your credit score. However, if you’re using a large portion of your income to make mortgage payments, it can negatively impact your credit utilization ratio, which can lower your credit score.
Furthermore, if you’re using your investment property as a source of income, it’s essential to ensure you’re meeting your financial obligations and not over-leveraging yourself. Taking on too much debt or missing payments can negatively impact your credit score and make it challenging to secure future financing. It’s crucial to manage your finances carefully and maintain a good credit utilization ratio to avoid any negative impacts on your credit.
Can I still rent out my investment property if I’ve lived in it?
Yes, you can still rent out your investment property even if you’ve lived in it, but there are some considerations to keep in mind. For instance, you may need to comply with local landlord-tenant laws, which can vary depending on your location. Additionally, you may need to make changes to the property to make it rent-ready, which can involve renovating the property or making cosmetic changes.
It’s also essential to review your insurance coverage and tax situation to ensure you’re meeting the necessary requirements. You may need to switch to a landlord insurance policy, and you’ll need to report rental income on your tax return. Furthermore, you may need to navigate complex tax implications, such as depreciation and passive income rules. It’s crucial to consult with a tax professional or real estate expert to ensure you’re meeting the necessary requirements and following the correct procedures.
Are there any emotional implications of living in my investment property?
Living in your investment property can have emotional implications, particularly if you’re emotionally attached to the property. For instance, you may feel a sense of pride and accomplishment owning the property, but you may also feel anxious about the financial burden or the responsibilities that come with property ownership. Additionally, you may struggle with the idea of renting out the property in the future, particularly if you’ve developed an emotional attachment to the property.
It’s essential to separate your emotional attachment to the property from your financial goals and objectives. You may need to take a step back and evaluate your priorities, considering what’s best for your financial situation and goals. Furthermore, it’s crucial to develop a clear understanding of your motivations and expectations, and to prioritize your financial well-being above any emotional attachment to the property.