When it comes to deciding whether you should rent or sell your house, are you worried you’ll make the wrong financial moves? Here’s how to make the right call.
Image: Joe Schmelzer/Offset
When your current home no longer suits you, selling it is a popular option. But in some cases, turning it into a rental home might make more sense.
There are lots of factors to consider when making the “sell vs. rent my home” decision, including:
- Your financial situation.
- Local market conditions for rental homes.
- Your future housing plans.
- Your tolerance for being a landlord.
- State and federal income taxes.
- Current and projected home prices.
Other factors to consider include:
Is Your Move Permanent?
Going away for a few years and planning to come back to the area? It may be cheaper to rent your house and move back in when you return, rather than paying sales commissions to sell your current home and purchase of another one when you get back.
You’re Being Transferred, But You Are Likely Coming Back
Suppose you have owned and lived in your home for two or more years but are now being transferred to a different city temporarily, after which you plan to return. You can rent your home for up to three years without losing the chance to sell it with no capital gains tax. So long as you owned and lived in the house for two of the five years prior to the sale, any capital gain on the sale can generally be excluded.
Therefore, by turning your home into a rental, you keep the option to move back in when you return, or sell it and avoid paying capital gains tax on any gain you might have.
Can You Rent Your Home for Enough to Cover the Mortgage Payment and Expenses?
If you can, keeping your house can be a smart way to help fund your retirement. Each month your tenants pay rent. You likely won’t pay tax on that income if you have enough expenses to offset it (like mortgage interest and repair costs).
When you finish paying off your mortgage or once you retire, you can sell the house and convert your equity into a lump sum, or continue renting it and collecting income during your retirement.
Do You Need More Tax Deductions?
When you rent your home instead of selling, you get to depreciate it for tax purposes. In most cases, you divide the amount you paid for the house, plus the cost of major improvements (less the value of the land) by 27.5 (that’s how many years the tax law says a house must be depreciated) to arrive at your annual depreciation.
For example, if you paid $100,000 for the house, and the portion allocated to the land is $20,000, you get to deduct $2,909 in depreciation annually ($80,000/27.5). Along with this, you can deduct other expenses, such as property taxes, repairs, and community association fees.
You Think Home Prices Are Going to Rise Over the Next Five Years
Even if your rental income doesn’t cover all your expenses (mortgage, property taxes, repairs, etc.), you might make up that loss if your home’s value rises before you sell it.
Say your home is worth $100,000 today and your expenses are $1,000 a year more than the rent you can collect. Over 10 years, you’ll lose $10,000 ($1,000 x 10 years), but if your home sale nets you more than $110,000, you’ll make money despite those annual losses. Your annual losses might be tax deductible, saving you money on your tax bill.
What’s Your Home’s Condition?
Renters, more so than buyers, can be willing to overlook outdated home fixtures because renters know they’re just passing through your home, not owning it.
If you don’t have the money to invest in improvements and your home’s fixtures scream 1970s (and not in a good, retro chic way), renting may be the better choice.
You Need the Profit From Selling Your Home to Fund Your Move-Up Home
If you need a different home and must sell your current home so you can use the equity as a downpayment, you might want to sell your home vs. renting it.
If you don’t need all the equity in your home for your downpayment, you might be able to take out a home equity loan or refinance into an investor loan and use the loan proceeds as your downpayment, and still make your home a rental.
You Freak Out About Condition and Panic Over Repairs
When someone lives in your home, they can scuff the walls, burn the countertops, and forget to water your prized shrubberies. If you can’t live with that wear and tear, sell rather than rent your home.
Becoming a landlord usually means you still have to maintain your house. You’ll get the bills when the plumbing springs a leak or the refrigerator dies. If making DIY repairs is beyond you and paying for upkeep is going to cause you to panic, opt to sell your house vs. renting it to save your sanity. You can save many of these headaches by using a property manager, but this, of course, will cost you.
Can You Evict a Tenant Who Fails to Pay?
If you wouldn’t have the heart to force out a renter who didn’t pay, you shouldn’t become a landlord — or if you do become a landlord, plan to have a pro manage your property.