Tax Rules for Converting Rentals to Residences Clarified
Investors planning to convert a rental property into a personal residence before selling face specific tax implications in 2026. According to new guidance, sellers may not qualify for the full $250,000/$500,000 capital gain exclusion, and any depreciation claimed during the rental period will be subject to a recapture tax.
- The Chicago multifamily market is expected to have apartment deliveries fall below 4,000 units in 2026, the lowest level since 2012, which will help keep vacancy rates low. Modest rent growth of around 0.5% is predicted for 2026, with the average effective rent reaching $2,300 per month. - For those looking to invest in specific Chicago neighborhoods, areas like Logan Square, West Town, Rogers Park, and River North show high rental demand and rising property values. Neighborhoods on the South Side, such as Bronzeville, are experiencing revitalization and offer more affordable investment options with long-term growth potential. - Investors can defer capital gains taxes from a property sale by using a 1031 exchange, which involves reinvesting the proceeds into a "like-kind" property. This is a common strategy for investors looking to grow their portfolios without incurring immediate tax liabilities. - To analyze publicly traded Real Estate Investment Trusts (REITs), investors should look beyond standard metrics like earnings per share. Instead, focus on Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO), which provide a more accurate picture of a REIT's cash flow and dividend-paying ability. - For hospitality professionals transitioning to real estate investment firms, essential skills include financial modeling in Excel and ARGUS, understanding real estate valuation methods, and strong analytical abilities. Networking and potentially pursuing certifications like the CFA can also be advantageous. - Building capital for an initial real estate investment can be approached through various strategies, including the "BRRRR" method (Buy, Rehab, Rent, Refinance, Repeat), forming partnerships with other investors, or utilizing hard money and private lenders. - Adaptive reuse projects are becoming a significant source of new housing units in Chicago, with 806 such units scheduled for delivery downtown in 2026 and thousands more proposed. Neighborhoods like Uptown and Lakeview are also seeing a rise in adaptive reuse developments. - The industrial real estate sector in the Midwest remains strong, with Chicago's industrial rent growth outpacing the national average in 2024. The region benefits from affordable labor, ample land, and robust infrastructure, which continues to attract leasing activity.
