Moving and trying to decide whether to rent out or sell your present home? If so, consider two important factors:
- How your choice will affect your cash position
- How willing and able you are to manage a rental property
Are you buying another home? If so, you may need the proceeds from the sale of your present home to fund the purchase of your new one. If you anticipate that the sale might result in a loss, consider whether it would be better to rent out your present home, at least until the real estate market turns around. You may need to accept the loss to currently realize the cash that a sale now would bring. If the sale results in a capital gain, consider whether you will be able to exclude that gain from federal income taxation. (If you meet all of the requirements, you may exclude up to $250,000; up to $500,000 if you're married and file a joint return.) If you aren't able to exclude all or part of the capital gain, you may need to reserve a portion of the proceeds from the sale to cover the taxes due. Or you may need to defer the sale and rent out your home in the interim.
If you decide to rent out your present home, will your rental income cover the ongoing expenses associated with the property? Will it cover mortgage payments, property taxes, and insurance? If not, determine whether you can afford to cover the difference on an ongoing basis. Will the tenants be responsible for all utilities, or will you have to cover some of these expenses? Consider what your anticipated annual maintenance expenses on the property might be. Most importantly, if the property were vacant even for a brief period, think about whether you could cover these expenses without a steady stream of rental income.
If you decide to rent out your present home, you'll be a landlord. You'll have to decide whether to manage the property yourself or hire a local property management service. The decision may hinge on whether you are moving a few miles away or a few states away. Familiarize yourself with the various laws that govern landlord/tenant relations. You'll have to meet health and safety code requirements and perform maintenance and repairs on the property yourself, or hire others for these tasks.
Renting out your home can also have tax implications. For instance, if you rent your home temporarily, you may still qualify for the capital gain exclusion when you later sell your home, but that's not the case if your property is considered permanent rental property. Assuming you rent your home on a temporary basis for more than 15 days during the tax year, you'll have to declare the rent you collect as income. However, you can 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. Depreciation deductions, it should be noted, may impact the amount of capital gain that you can exclude from federal income taxation when you sell the property.
If you permanently convert your home to rental property, the tax treatment may be different. Before you make the decision to rent out your home, you may want to consult an accountant or other tax professional. If you have friends or colleagues who have rented out their homes, you might also ask them about their experiences as landlords.
Contact us to learn the best steps to limit your tax liability and ensure you’ve taken all allowable deductions and credits.
- John H. Adair
- Adair Advisory Group
Tags:John H. Adair, Adair Advisory Group, Tax, Rental, Capital Gain