When you are moving out of a house, you can be faced with difficult decisions to make. Should you sell or rent your home out to someone else? It’s a difficult choice that can result with a lot of potential costs in the long run. Renting out your home can be a great way to generate passive income; and it can also result in numerous costs that can be overwhelming to any profit you could be making.
It’s most likely your current home will not suit your needs forever. It’s possible that one day you or your spouse may need to relocate for work, in which case it’s time to say goodbye to your current address. Or you may want a larger house as your family grows. And what about when your children are older and have left the nest, then you may want to downsize to something smaller to suit your needs.
The million-dollar question is what to do with your home once it is time for you to move? Are you better off holding on to your property and using it as a rental, or does it make more sense to sell it? While renting allows you to either pay off your mortgage or make a little money each month, it also comes with a fair amount of risk and added tax complications.
Sell or Rent Your Home
It is also something to consider, that if you were to sell your home you could include in the paperwork that you want a buyer who will “assume your mortgage”, which means a buyer will assume (now be responsible for) the rate, repayment period, current principal balance, and other terms of the seller’s existing contract regarding the loan – if paying off two mortgages was a big concern, this could serve as your solution, if you sell.
Tax on Rental Income
Similar to dividends from stock or wages from a job, you’re assessed income tax on any income you derive from your rental, at your ordinary tax rate. Gratefully, you can write off all the costs associated with renting the house. For example, if your gross rental income for the year is $50,000 but you incurred $40,000 in rental expenses, you are only assessed tax on $10,000.
Along with deducting cash expenses, you can also claim a deduction for depreciation expenses. This non-cash expense allows you to slowly but surely deduct the amount you paid to purchase your old home. Also, if you have a rental loss, you may be able to use the loss to offset some of your income if your adjusted gross income is less than $150,000.
Ask a CPA for more details on deducting any losses or depreciation.
Capital Gains and Sales Price
If you are not satisfied with your current home value, renting out your old home can provide some income while you are waiting for your house value to rise. If homes are appreciating rapidly in your area, it may be wise to wait. Unfortunately, however, this tactic can backfire on you if you wait too long to sell.
After you rent out the home for more than three years, you can no longer claim it as your primary residence, which means you are liable for tax on the sale of the residence.
When selling a home that is not your primary residence, you must pay capital gains taxes on any profit, which varies from 0% to 20% depending on your tax bracket. When selling your primary residence however, you can exclude $250,000 of capital gains, or $500,000 if you are a married couple, once you sell.
In order for your home to qualify as a primary residence, you must have lived there for two of the last five years. If you time your sale wrong, you could end up owing tens of thousands of dollars in capital gains after selling your rental. Be wary of this.
Here’s hoping that you can keep your home rented most of the time and cover most or all of the mortgage payments. However, you should be prepared for the worst case scenario: paying off double mortgages for your rental and your personal residence.
Even with no tenant, you still incur rental expenses including maintenance, legalities, insurance, accounting and advertising fees.
Also, in most cases it can be quite difficult and time consuming to evict a tenant who is not paying rent. If you have a tenant who will not pay rent or causes damages to the house, it is possible that your rental could fail to make a profit for several months.
With court and attorney fees, repairs, cleaning expenses, and loss of rent, the average costs of evicting a tenant are approximately $3,000.
Time and Stress
Becoming a landlord can be time consuming and emotionally draining. You are responsible for advertising, showing the home, and running background checks (which you can do with this Rental Application, you’re welcome ☺) to get the home rented.
You have to aid to calls from tenants, handle maintenance repairs, and deal with any emergencies.
A urban area, with the house in the foreground balancing coins on a lever. Symbolizing the balance of outgoings, tax or mortgage rates.Although you could hire a property management firm to do all of this for you, just expect a charge of at least 10% of your rental revenue.
Although, you need to consider the expenses of having a renter first and foremost. You are now officially the go to person for repairs as a landlord, you will be paying two mortgages (if your home is not paid off) because renters can not assume your loan. And if for some terrible, turn of event, gut wrenching, bad luck probability that you get an unfavorable tenant who does not pay rent or damages the property!?
Then as aforementioned, courts dates, lawyers and evictions can certainly become quite expensive. Please take a close look at your equity as well, usually the way most homeowners provide the down payment for their next home is by cashing out the equity they have put into the one they already own. Can you pull together enough for a 20% down payment on your next desired home without selling your existing one? Please consider this carefully before deciding to rent out or sell as well.
Renting a house, like many investment strategies, is a risk. If your home value appreciates over time, rents continue to rise, and you can keep the home rented, your property can provide a wonderful return on investment.
However, if rents decline in your area, your home value doesn’t grow as fast as expected, or you get tenants who do not pay their rent, it may not be a great investment, but rather a nightmare.
Make sure you have a fair amount of available cash to cover emergency situations, you can speak with a financial advisor to make sure you have a good amount of available cash for said emergencies, before you make your decision.
It can also be true, depending on when exactly you’ve purchased your home and what it is worth now, that you could be losing value on your home if you were to in fact sell today.
It is important to consider the city and location of your home, the time you purchased, the amount you paid, your current financial situation, the state of the housing market, and any state or local ordinances that affect your rights as a landlord, when coming to the conclusion of selling or renting out your home.
Best of luck to you with whatever path you go down. If you decide to sell, please feel free to contact me for any questions or needs.