Selling vs. Renting

Should you sell or rent your house? The decision whether to sell your house or to buy it is complex as it has its specific advantages and disadvantages.

Decision Factors

• Sufficient funds.
  Can you afford two homes? You may be able to refinance and borrow the difference of money to buy a new house, but usually there will be periods during which the rental is vacant and generating no income. So you have to make sure that you have sufficient funds to cover both homes for at least several months.
• Rental market. You should investigate the local supply and demand for renting housing, services that Jerry Mueller Real Estate provides them. There should be enough demand for rental properties in your client�s area. You also should be aware of the rents charged for similar properties. Jerry Mueller Real Estate Company offers this kind of information. You should also research zoning restrictions to prevent unpleasant surprises.
• Problematical tenants. There is a saying that a vacant rental is better than a bad tenant, but is not desirable also. It could take a lot of time to evict someone. The tenants can cause damages to your house. Check the local laws concerning eviction tenants. Run a credit check on the applicants also ask for references.
• How to manage the property. If you live far from the rented property or you are not available, it would be better to hire a professional manager to collect the rents and arrange the repairs for you. Usually managers charge 8% to 10% of the rental income. Jerry Mueller Real Estate Company also can help you with that, offering you information about the advantages and costs of the rental management.
• Taxes. The current law gives a great deal of flexibility to homeowners when dealing with a former residence. If the taxpayer has lived in the rented house as a primary residence for any of two of the previous five years, any gain on the sale of the house is excluded from taxation up to $500,000 for married taxpayers filing a joint return and $250,000 for single tax payers. So with an effective communication and careful planning we can avoid taxation on the sale of a former property, even after converting it into income producing residence.

Tax Implications Of Renting Your Home

IRC section 121 has increased homeowners� flexibility tremendously. Owners can rent their prior residences for up to three years of the past five years and still take advantage of the $500,000 ($250,000 single) exclusion of gain on the sale of a personal residence as long as the home was their personal residence for two of those five years. In this context, owners can move back into a former home and make it once again their principal residence. After two years as a principal residence, the property qualifies for the exclusion for the gain on a sale. It should be noted, however, that any portion of the gain attributable to depreciation taken while the home was rented is taxed at a rate of 25% under section 121(d)(6) and section 1(b)(7). Any gain not covered by the exclusion may be eligible for the reduced long-term capital gain rate of 15% (5% for taxpayers in the 10% and 15% brackets). The American Jobs Creation Act of 2004 provides that the exclusion for gain on the sale of a principal residence does not apply if the residence was acquired in a like-kind exchange in which any gain was not recognized within the previous five years. A detailed discussion of the tax issues is beyond the scope of this article. For more information see �The Home Sale Gain Exclusion� in the JofA (Oct.02, page 85).

Unrealized gain on a rental home also may be deferred by exchanging the property for other like-kind property under section 1031. Any gain on the sale of a rental home in excess of the amount of depreciation deductions taken is eligible for capital gain treatment. Losses on the sale of a rental home are deductible whereas a loss from the sale of a personal residence is not deductible.

One more thing to mention is that rental homes are subject to the tax law�s passive loss rules. Thus, a rental loss may not be deductible against their nonpassive income. Fortunately, there is an exception from the passive loss limitations for taxpayers with adjusted gross income less than $150,000. Section 469(i) allows someone who actively participates in the rental of real estate to deduct up to $25,000 of net passive losses from rental real estate. Active participation requires that the owner make management decisions such as approving tenants, repairs and establishing the rent charge.