The Pros and Cons
If you currently own a home and are moving to a new home, you may be wondering what’s the better choice: renting out your current place, or selling it? Selling versus renting a home is a huge decision— and not something to be taken lightly.
There are benefits to both of these options, but there are also drawbacks. The issues outlined below can help you better understand which option is right for you.
A major area of concern for both renting and selling is taxes. When selling your home, you will have to consider the issue of capital gains. There are tax breaks associated with homes that you have lived in for two of the past five years, which can allow you to avoid any capital gains taxes. If you are a married couple that files jointly you can have up to $500,000 in capital gains tax-free, and singles can have $250,000 in tax-free capital gains if the home in question was the primary residences for two of the past five years. This does discourage some people from renting out their homes, because if they do decide to sell down the road, they can be subject to these taxes. The general guideline is that if your personal residence has a large gain, you are better off selling the home then renting it—unless you plan to move back into the home for two years after renting it out before you sell it.
There are also tax issues that you will need to consider with renting out a home. There are some tax perks related to being a landlord—for instance, the numerous deductions associated with renting out a home can easily eliminate any taxes on your rental income. It is important to remember the issue of capital gains, and also to note that any value that you have depreciated from the home will also be taxed. Some of the expenses you can deduct include the out-of-pocket expenses that come with owning and managing a rental property, like property taxes and mortgage interest payments. Advertising, broker’s fees, costs of repairs and maintenance expenses can also be deducted from your taxes.
Depreciation is another big tax deduction associated with renting. The recovery period for a residential rental property is 27.5, years which means you can deduct around 3.5% of the home’s value from your annual tax bill. When renting out a home you cannot deduct the cost of improvements to the home but you can use depreciation to recover these costs. This can be a drawback for many homeowners because they carry the burden of the costs upfront, and are only able to recuperate a small amount in their tax deductions each year.
Cost of Renting
The next big factor that will affect your decision to rent or sell is the cost of renting. For many homeowners the cost to carry a home is too high, and renting is simply not an option. A great deal of capital is necessary to purchase a new home, and by selling their current home they are easily able to raise that capital. The cash reserves necessary to own more than one home are also high. Cash reserves are necessary for a rental home because there are periods of time when rental properties are vacant, tenants do not pay rent, or other factors that affect cash flow, but the mortgage payments must still be paid. Damage and other problems that can occur with a rental property must also be considered. For instance, the eviction process can be very costly, can take a great deal of time, and the tenant may refuse to pay rent during the eviction process. Damaged property is another cost to consider, but a landlords can protect themselves from these costs by requiring a security deposit. There are other general costs to consider, such as replacing broken appliances, replacing carpets, painting, and other general maintenance costs that the landlord is responsible for.
Becoming a Landlord
One major drawback many people experience with renting out properties is the stress of becoming a landlord. Becoming a landlord involves much responsibility, and there are a lot of factors to consider. As a landlord, you’re on call for repairs at any time of the day—and it seems like they happen at the least opportune times! Some homeowners do hire companies to oversee their rental properties, but this can be a costly service. Renting out a home with a mortgage payment may yield a profit, but this could be eaten up by the commission you may to the property-management company, leaving you with the burden of paying for repairs and maintenance on the property without any financial gains. Also, some homeowners are not prepared to have their homes invaded by strangers. Renting out your home can be difficult if you have a personal connection to the property.
Selling your home may be the best choice if becoming a landlord is a stressful idea, but if you are interested in become a landlord, renting may be a great choice. Before taking on the burden of managing a rental property, it is advised that you do some research and educate yourself on the process of renting a home and study the local laws regarding rentals. Keeping up with state laws for rental properties can be a challenge, but if you are dedicated to renting out your property it can be done. In the end, the decision to rent out or sell your home is a personal one. The right choice for you may be different from the right choice for your friends or family, and the best way to make this decision is to weigh out your personal situation. Working directly with a real estate agent on this matter can also be beneficial. Oftentimes a professional’s insight can help you to make an informed decision about your own personal circumstances