Should You Sell or Rent Your Home

In most cases, moving means you need to sell your current home. Let’s face it—most people need to sell their current home so that they can afford their new home. It is often an integral part in moving. However, considering the current housing market, if you cannot sell your home for a profit, you are probably considering renting your home—at least until the real estate market turns around.

If you are trying to decide whether to rent or sell your present home, consider two important factors:

• How your choice will affect your cash position, and
• How willing and able you are to manage a rental property.

Cash Position: If you are you buying another home, you may need the proceeds from the sale of your present home to fund the purchase of your new one.

• If selling would result in a loss because of the current property values you may want to consider whether it would be better to rent your present home until the real estate market turns around.
  • You may need to accept a loss on the home if you need to bring in the cash for your new purchase.
• If the sale results in a capital gain, consider whether you will be able to exclude that gain from federal income taxation:
  • If this is your principal residence, you may be able to exclude up to $250,000; up to $500,000 if you’re married and file a joint return.
  • If you are ineligible to exclude all or part of the capital gain, you may consider reserving a portion of the proceeds from the sale to cover the taxes due.

Managing a Rental Property: If you decide to rent your present home, you should determine if your rental income will cover the ongoing expenses of the property.

• Your rental income should be enough to cover the mortgage payments, property taxes, and insurance.
  • If it does not, you need to determine whether you can afford to cover the difference indefinitely.
  • Be aware of a change in your insurance as your homeowners premiums can increase if you do not live in the house. and you should also have additional liability insurance for the rental.
  • Most importantly, if the property were vacant even for a brief period, consider whether you could cover these expenses without a steady stream of rental income.
• If you decide to rent your present home, you then become a landlord, which can quickly become a second job.
  • You should learn the various laws that govern landlord/tenant relations in your state.
  • You will have to maintain the property to meet health and safety code requirements.
  • Maintenance and repairs on the property become your responsibility as your tenants will look to you when something is broken.
  • You should decide if your tenants will be responsible for all utilities.
• Consider a property management service:
  • If you are moving a few states away, and/or
  • If you are physically unable to maintain a property.

Tax Implications: Renting your home can also have tax consequences.

• If you only rent your home temporarily, you may still qualify for the capital gain exclusion when you later sell your home.
  • Once your property is considered permanent rental property, you should incur capital gains if you profit when you decide to sell.
• If you rent your home for more than 15 days during the tax year, you will need to declare the rental income.
  • You may be able to offset rental income with allowable interest and property tax deductions.
  • To the extent that the rental income exceeds these otherwise allowable deductions, you can also claim rental deductions for maintenance, insurance, and depreciation.
  • These expenses, though, are limited to the amount of rental income.
  • Rental real estate activities are generally considered passive, so consult a Tax Consultant or C.P.A. when considering deductions.
• If you permanently convert your home to rental property, the tax treatment may be different.

Pros and Cons:

• Renting
  • Pros
    • Rent may be able to covers mortgage, taxes, insurance payments and still result in a profit.
    • You may be able to keep the property as it appreciates.
    • Tax-breaks could offset taxes due on rental income.
  • Cons
    • Tenants may not care for the property as you would, so it may suffer damages.
    • You could be taxed on the whole profit when you decide to sell.
    • You could have legal or financial problems with tenants.
• Selling
  • Pros
    • Your primary residence is likely eligible for a tax-free capital gain.
    • The profit from a sale may allow for more cash for a future purchase.
    • You will have only one house to maintain.
  • Cons
    • Lose potential property appreciation.
    • Acceptance of depressed housing price in a soft real-estate market.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.