For many homeowners, buying a new home is contingent on selling a current one, but that isn’t the only option. When some retirees are ready to downsize, they find that they are in a better position to rent their previous home than sell it outright. How can you decide which option is best for you? Start by considering these factors.
When it comes to the question of renting or selling your home, the decision is often dependent on affordability. If you need the profit from the sale of your home to make a downpayment on your next home, keeping it as a rental is clearly not a viable option.
If you plan to move out and rent your current home, you will need enough cash to make a downpayment on your new home (or buy it outright) and enough money to cover owning both homes until you can find a suitable renter. You will also need to have money set aside for emergencies, such as repairs or in case your renter moves out unexpectedly or begins missing payments. You may also incur expenses for any damage that a renter makes to the property or if you run into legal problems with a renter.
The amount of money you can make by renting your home depends on the amount of your mortgage payments and the average cost of rent in your location. At a minimum, you want to set rental rates which cover your monthly mortgage, taxes, and insurance costs. If you own your home outright or have very low mortgage payments for the area, you may be able to bring in extra money each month.
Renting may also be an option when you have less equity in your home and are having trouble selling it for enough to pay off your mortgage. If you are able to rent your home for a price which covers your mortgage payments, you can hold onto your home until its value appreciates.
Taxes come into play when considering whether to rent or sell your home as well. If you have lived in your home for at least two of the last five years, you are likely to be eligible for capital gains tax breaks. On the other hand, this means that if you rent your home for three or more years before selling, any profit you make on the sale would be taxed as a capital gain.
If you decide to rent, there are some attractive tax deductions available to landlords. You can deduct most expenses related to owning and managing the home, including your property taxes and mortgage interest payments. You can also use an annual depreciation deduction which could offset the income you receive from rent. A Certified Public Accountant (CPA) can explain these deductions in more detail.
Beyond financial considerations, you may have other reasons to choose selling or renting your home. If you are relocating, renting your home keeps open the possibility of one day moving back without being priced out of the area.
However, selling your home is less complicated than having to worry about maintaining a rental property. If you are trying to decide whether to rent or sell your home, its best to get professional advice. Talk to a CPA, a local property management service, and your real estate agent. The best decision is the one which works for your current situation.