[jwzimm]

Another topic some folks don't consider is Capital Gains tax. You are allowed an exemption of $250k (or $500k if married) which you can shield from the Cap Gains tax when you sell your primary residence. The key here is how that is defined. The IRS defines your primary residence as a home you have lived in for 2 of the last 5 years (non-consecutively). What that boils down to is you are able to rent out your house for up to 3 years and still be able to shield the proceeds from a sale from the Capital Gains tax. If you do not sell it prior to 3 years after moving out of the property (to the day) you will be liable to pay Capital Gain tax on 100% of the proceeds.

One exception to this rule is the like-kind exchange whereby you can shield those proceeds provided you reinvest them immediately into a like-kind investment. The catch is, you would be required to invest them into another rental property. You cannot use them for the purchase of a private residence.

Another factor is depreciation of the rental property. When you do your taxes the rental income is counted as taxable income. You can usually offset a good portion of this income by claiming the depreciation of the home (a total non-sequitor as homes usually increase in value but that is the IRS for you). The big "gotcha" is that you will be liable to pay the taxes on all of the depreciation that was able to be claimed against an investment property when you sell it. That is true even if you did not claim the depreciation in previous years taxes. That means there is zero sense in not claiming the depreciation of the asset.

In any case, I highly recommend you speak with an accountant about this unless you feel you have a good grasp of all of the implications. I did a fair amount of research and have a pretty good idea of the tax stuff but I still opted to get a tax accountant for this.