Should I Sell My Home or Rent It Out?

Homeowners often face a significant decision when relocating: whether to sell their current home or transform it into a rental property. This choice is rarely straightforward, as both paths involve distinct financial, tax, and practical considerations. The optimal decision hinges on an individual’s unique circumstances and objectives. Evaluating each option’s implications is necessary to determine the most suitable course of action.

Financial Implications of Selling Your Home

Selling a home involves various costs that reduce the net proceeds received from the sale. Real estate agent commissions typically range from 5% to 6% of the sale price, divided between the buyer’s and seller’s agents. Other selling expenses include closing costs, which can include title insurance, escrow fees, and transfer taxes, varying by transaction. Preparing the home for sale often incurs additional expenses, such as staging, averaging about $1,849, and necessary repairs.

After accounting for these selling costs and deducting the outstanding mortgage balance, the remaining sum represents the net proceeds. These proceeds provide access to accumulated equity, usable for other investments or a down payment on a new residence. Market conditions significantly influence the sale price and time to sell. A seller’s market, with high demand and low inventory, may result in a quicker sale and higher price, while a buyer’s market could lead to the opposite.

Moving expenses also contribute to the financial outlay. The average cost for moves in 2025 is around $3,020. These costs fluctuate based on belongings and distance, impacting the total financial picture.

Financial Implications of Renting Out Your Home

Converting a home into a rental property means focusing on ongoing income and expenses. Researching local market rates is crucial to estimate potential rental income, considering factors like property size, location, and vacancies. A vacant property generates no income, directly impacting profitability.

Operating expenses are a continuous outflow for landlords, encompassing mortgage payments, property taxes, and insurance premiums. Landlord insurance policies are typically 15% to 25% more expensive than standard homeowner’s insurance due to increased liability and risks associated with tenants. Routine maintenance and unexpected repairs are significant costs, requiring a reserve fund for upkeep.

Additional expenses may include utilities (if covered by the landlord) and property management fees (if professional assistance is utilized). Property management services typically charge between 8% and 12% of the collected monthly rent, alongside potential setup, leasing, or renewal fees. Calculating estimated monthly cash flow (gross rental income minus operating expenses) provides a clear financial picture. While long-term property appreciation is possible, it is not guaranteed and should not be the sole basis for the financial decision.

Tax Implications of Selling

Selling a primary residence has specific tax consequences, primarily concerning capital gains. A capital gain occurs when the sale price of a home exceeds its adjusted basis. The adjusted basis is generally the original purchase price plus the cost of qualified capital improvements (e.g., additions or renovations), minus certain decreases like depreciation if previously used for business or rental.

The Section 121 exclusion allows a portion of the capital gain from a primary residence sale to be excluded from taxable income. Single filers can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000. To qualify for this exclusion, the homeowner must have owned and used the home as their primary residence for at least two of the five years preceding the sale.

This exclusion applies only to a primary residence and cannot be used if another home sale exclusion was claimed within the prior two years. The sale must be reported to the IRS, even if the gain is fully excludable.

Tax Implications of Renting

Rental income is generally subject to taxation, requiring landlords to report all income. However, various operating expenses can be deducted, reducing taxable income. Common deductible expenses include mortgage interest, property taxes, insurance premiums, and repairs.

Other deductible expenses include utilities (if paid by the landlord), property management fees, advertising, and legal or accounting fees. Depreciation is a notable non-cash expense, allowing landlords to recover the property’s cost over its useful life. For residential rental property, the useful life is typically 27.5 years, accounting for wear and tear on the building structure, excluding land value.

The IRS classifies rental activities as passive, meaning any losses are generally subject to passive activity loss (PAL) rules. These rules limit loss deductibility against non-passive income, such as wages or business profits. An exception exists for “active participants,” allowing deduction of up to $25,000 in rental losses against non-passive income, though this phases out for higher-income individuals.

Maintaining meticulous records of rental income and expenses is paramount for accurate tax reporting and substantiating deductions. Proper documentation ensures compliance with IRS regulations and can be critical in an audit.

Practical Considerations and Personal Factors

Beyond financial and tax implications, practical considerations and personal factors influence the decision to sell or rent. Becoming a landlord demands a time commitment, involving finding and screening tenants, managing lease agreements, and addressing maintenance requests. Handling repairs and communicating with tenants requires ongoing attention.

Landlords also assume legal and practical responsibilities beyond basic property upkeep. Compliance with fair housing laws, prohibiting discrimination based on protected characteristics (e.g., race, religion, familial status, disability), is mandatory throughout the tenant selection and housing process. Understanding tenant rights and local housing regulations is necessary to avoid legal issues.

Emotional attachment to a home can play a role; selling may feel like a definitive break, while renting maintains a connection. Future plans, including time away from the area and potential for returning, should factor into the decision. Managing a rental property from a distance adds complexities and may necessitate hiring a property manager.

An individual’s tolerance for risk is a personal factor. Landlords face risks such as tenant disputes, property damage, extended vacancies, and market fluctuations. Evaluating comfort with these challenges is important.