“I can’t sell…should I lease my home out?”

This is a popular question among homeowners that are trying to sell their homes or even some that are deciding whether they should list their homes. Here are some facts that one should consider and I’ll conclude by briefly outlining the pros and cons of leasing your home out to tenants.

Tax “Issues”
If you have lived in your home for 2 of the last 5 years and decide to sell, you will not have to pay capital gains taxes on the money that you receive (Please refer to previous blog post about capital gains.) However, if you decide to rent your home out (especially for a long period of time) you may eventually have to pay capital gains taxes. If you are planning on a short-term rental, you may avoid that as long as you have lived in the home for 2 of the last 5 years, BUT you may be taxed on the amount you depreciate.

Another thing to consider with respect to taxes, is that with rental property one has A LOT more deductions. For example, you can deduct mortgage interest payments, property taxes along with almost any expense related to the maintenance (not improvements) and other costs of owning and managing the property. You can also deduct the depreciation of the house every year (Value of your home dividing by 27.5 = the total annual depreciation).

Can You Afford to be a Landlord?
If you need to sell your home to raise the capital to buy a new home, then renting your property out may not be a good option. Also consider if you have two mortgages and for some reason you don’t have a tenant in your rental property, do you have the cash reserves to handle two mortages? What about if your rental property needs repairs.

Are You Cut Out to be a Landlord?
Do you have a deep conection to your property? Will you feel comfortable with allowing a tenant to live there? These are also important questions.

What happens if you are out of town and the pipes break? Are you prepared to handle that. A landlord must be somewhat present to handle such issues. You may also want to consider hiring a management company to take care of any maintenane request and finding a quality tenant.  More to come about King Realty’s property management services.

Here’s a brief recap of the pros and cons.

Renting Out

Pros Cons
· Keep property as it appreciates
· Possible damages to property
· Tax-breaks could offset income tax on rent
· Could be taxed on the whole profit if you sell
· Rent income covers mortgage, taxes and insurance payments
· Potential legal or financial problems with tenants

Selling

Pros Cons
· Likely tax-free capital gain
· Could be priced out of market if you want to return
· Frees up equity that could be invested or rolled into new home
· Lose potential property appreciation
· Simplicity: Only one house to maintain
· Could have to sell at a bad time for real-estate market in your area