By Rich Cosgrove, President Stark Trumbull Area REALTORS®

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. 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 make better financial sense to rent your house and move back in when you return.

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.

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, 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 down payment, you might want to sell your home vs. renting it. If you don’t need all the equity in your home for your down payment, you might be able to take out a home equity loan or refinance into an investor loan and use the loan proceeds as your down payment, and still make your home a rental.

You Worry 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.

Overall, when you determine whether to rent or sell your property you should consider what your needs are. Asking a REALTOR about your options can ease any concerns you may have on selling or renting your home. Agents are well versed on both sides of the spectrum and can help eliminate any hesitations and are always willing to lend a helping hand to sell or rent your property. Again, a REALTOR® is one of the best allies you may have when making decisions based on the real estate industry.

Rich Cosgrove is the President of Stark Trumbull Area Realtors which serves Stark, Carroll, and Trumbull counties. Visit the website www.star.realtor for a complete listing of Realtor and Affiliate members. If you have any questions or comments on this article, please contact Cosgrove by email at president@star.realtor.

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