Should I Sell My House or Rent It Out?

I can’t begin to tell you how frequently potential home buyers, particularly first time buyers, tell me that they intend to rent out their home when they decide to move. And while that may seem like a good idea, I find that buyers rarely know what tax benefits they may be missing out on when they do that.  With that in mind, here are some things to consider when deciding whether to rent your home out or to sell it:

Benefits of renting out your home: 

1. You may have a stream of additional monthly income by renting it out for more than you pay on your mortgage and condo or homeowners association fees, if applicable.

2. You could build additional equity that you can then cash out on later if the home appreciates over the long term.

3. Rental income can be used to help supplement your retirement income and eventually you may pay the mortgage off (though that is not necessarily a great idea).

4. Passing the property along to your heirs at a future date, they would likely receive a “stepped up basis” on the property, which will allow them to sell it if they wish without much tax liability.

5. You can tell your friends that you are a Real Estate Mogul.

Negatives of renting out your home:

1. Second job: being a landlord can be like having a second job. You will field calls from your tenants regularly and have to coordinate repairs to the property. You may also deal with other issues like advertising and showing the home.  Of course, you can hire a management company to do this for you, but many charge as much as much as 30% of the rent, which will quickly eat into your profits

2. Capital expenditures: at the very least you will need to paint and carpet whenever the property turns over, but larger repairs to the HVAC, roof, appliances, and other things can rapidly wipe out your profits

3. Vacancy: When lenders calculate income from a rental property, they use a “vacancy factor” as it’s unreasonable to think that a property will always be occupied.  Count on some months where you are looking for new tenants or at least fixing up between tenants where you will not receive your regular rental income   

Tax Implication of Selling vs Renting

This is a BIG one!  It’s very difficult in this country to receive large amounts of money TAX FREE, but the sale of your primary residence is one of them!  It’s called the 2/5 rule and here’s how it works: When you sell your home, you look back 5 years and if you have occupied the home as your primary residence for 2 of the last 5 years, then you can exempt up to $ 250k (single filer) or $ 500k (married filing jointly) when you sell your home.  Click here to learn more about the capital gains exclusion and how it works.

Trying to decide whether or not you should rent your home out or sell? Be sure to check out the second blog in this series next week. Want to talk it out? Contact me at 301-610-5480 for a discussion and analysis specific to your situation.

Feel free to check out our mortgage calculators, request a copy of our homebuyers guide or get started on your mortgage application.