Converting primary to rental for a couple of years

[TURB001]

I have been renting out part of my primary home on a long term and/or short term basis for the past several years and have been declaring the income and taking depreciation on my tax returns. 

In 2023, I got quite a few home improvements and maintenance work  done on my primary home such as brand new solar panels, a new large storage shed, attic insulation replacement, new attic fan, renovated garage, new epoxy flooring in the garage, new exterior paint etc.

I got laid off last month. I am contemplating on renting out my primary home for a year or maybe even 2-3 years  and moving to my second home which is not currently rentable as it needs major rehabbing work. The idea is to reduce my monthly liability so I can focus on finding a new job and also fixing the second home while staying there. However, I am not sure what would be tax implications in doing so? Will I lose my solar tax credit if I moved to the second house before one year of solar panel installation? Are there other tax consequences I should consider before making my primary home rental for a couple of years and making my secondary as primary for a couple of years and renting it out eventually once it is rehabbed?

Thank you in advance for your response.

[tagteam]

There are a lot of issues.

One primary issue would be the home sale exclusion (one or both of the properties).

See https://www.irs.gov/publications/p523#en_US_2022_publink100073574

Another would be depreciation recapture if you sell.

See https://www.irs.gov/publications/p523#en_US_2022_publink100077085

You should really seek guidance from a local tax professional for this matter.

[tagteam]

Re the tax credit:

Claiming the solar tax credit for rental property you own

You can't claim the Residential Clean Energy solar tax credit for installing solar power at rental properties you own unless you also live in the house for part of the year and use it as a rental when you're away.

• You'll have to reduce the credit for a vacation home or part-time rental property to reflect the time you're not there.
• If you live there for three months a year, for instance, you can only claim 25% of the credit. If the system cost $10,000, the 30% credit would be $3,000, and you could claim 25% of that, or $750.
  • $10,000 system cost x 0.30 (30% credit) = $3,000 full credit amount
  • $3,000 credit amount x 0.25 (25% of the year) = $750 partial credit amount

https://turbotax.intuit.com/tax-tips/going-green/federal-tax-credit-for-solar-energy/L7s9ZiB4D#GoTo-...

[TURB001]

Thank you for your response. correct me if I am wrong but since I am currently renting part of the house, I believe if I ever sell the house I would need to recapture the depreciation I have been taking anyway.

If I do convert my primary to rental, one of the three scenarios can happen.

1) I rehab the second home, make it a rental property and move back into my current primary in one to two years

2) I rehab the second home, sell it and move back to my current primary. 

3) I rehab the second home, make it my primary and sell my current primary (not an optimal scenario as I would still be paying a lot of money in capital gains on my current primary)

[TURB001]

At the time of solar installation the property was not 100% rental (only partial rental as I rented rooms). Even now, it is my primary. However, if I rent out the whole house, let's say sometime in March 2024, for the year 2023 it would still remain my primary home so wouldn't I qualify for full 30% tax credit? Per my understanding solar credit is one time for the new system on primary home (unless I add capacity, battery etc.) there won't be any solar tax credit in 2024 for me even if the house remained my primary through out the year. Am I missing something?