If you can't sell your house, should you rent it?
(MoneyWatch) Given the tight labor market, many people hoping to land a good job may ultimately have to move. That raises a related challenge -- selling their home at a reasonable price or that will pay off their mortgage.
If you are one of the many folks facing this situation, consider renting your home. It can lessen the financial burden, and you might even be able to turn a small profit.
Here are reasons why renting your home might make sense:
- You temporarily need to live in another location
- You can't sell house for an acceptable price
- Rental Income provides good cash flow
Rental pros:
- Keep property to sell later at a better price
- Rental income covers mortgage, taxes, insurance, and other costs
- Tax breaks offset rent or other income
Rental cons:
- You are the landlord
- Tenants may damage your property
- You could be taxed on gains if you later sell
The resulting amount is the amount you can take as
a depreciation deduction each year. For example, if the lesser value is
the current value of the building of $200,000, then divide that by 27.5
and you'll get $7,272, which is the annual depreciation deduction you
can take annually.
Now here is the really good part: The amount by which rental expenses exceed rental income is a tax deduction that can be used to offset or shelter up to $25,000 of other income, including salary. This juicy tax break is available as long as your adjusted gross income is $100,000 per year or less (this applies to single filers as well as marrieds). That tax benefit phases out gradually for anyone with annual income of more than $100,000 and may not be claimed at all by those earning more than $150,000.
If you later plan to sell a home that you've converted to a rental property, you should be aware of how the gains could be taxed. If you lived in the property for at least two years and then rented it out for less than three years, you may still be able to use the provision that allows you to exclude up to $500,000 of gains tax-free. But you will still have to pay income tax on any deductions you claimed for depreciation while renting it out. If you sell at a loss, the only deductible portion is the loss that occurred after you converted the house from personal to rental use (This is another reason you will need an appraisal when you begin renting out your home.)
Remember: Renting a home will come with various headaches and problems. You still need to maintain the property or pay someone else to do it for you. You also must check with your home insurance company to make sure you are still covered for damages while the home is rented. If not, then revise or change your coverage.
Finally, housing experts warn against hanging on to real estate for extended periods when the rent falls short of your pre-tax, out-of-pocket costs. Only look to the tax benefits to sweeten the financial results, not to determine whether to rent.
Image courtesy of Flickr user 401K
