Should You Rent Out Your House or Sell It?

Deciding whether to sell or rent out a home is a common dilemma for property owners, involving a careful evaluation of financial and practical factors. This choice has long-term implications for one’s financial standing and future commitments. Understanding the distinct processes, costs, and responsibilities associated with each path is important. This article provides an overview of the key considerations for both selling and renting a residential property, helping homeowners make an informed decision.

Selling Your Home

Selling a home involves navigating market conditions and incurring costs that impact net proceeds. Understanding the current real estate market is important, as conditions like local demand influence the potential sale price. Homeowners typically determine market value through a comparative market analysis (CMA) or a professional appraisal.

Beyond the sale price, sellers encounter expenses that reduce their net proceeds. Real estate agent commissions are a substantial cost, typically 5% to 6% of the home’s final sale price, usually split between the listing and buyer’s agents. Sellers also bear various closing costs, which can average between 6% and 10% of the sale price, including the agent commission. These costs may encompass transfer taxes, title insurance, and escrow or settlement fees.

Preparing a home for sale can involve additional expenses such as staging or necessary repairs to enhance marketability. These improvements, while potentially increasing the sale price, add to the overall outlay. After accounting for the sale price and all selling costs, homeowners can estimate their net proceeds.

The timing of a sale is influenced by economic indicators and interest rates. Low interest rates may attract more buyers, potentially leading to quicker sales and higher prices. Conversely, rising rates can cool buyer demand. Assessing the economic climate alongside local market conditions is important when deciding to sell.

Renting Out Your Home

Renting out a home transforms the owner into a landlord, introducing different financial considerations and ongoing responsibilities. Establishing a fair market rent is important, typically determined by researching comparable rental properties and evaluating the home’s features and amenities. This helps ensure the property is competitively priced to attract tenants and generate income.

Landlords incur recurring expenses that impact profitability. These include mortgage payments, property taxes, and insurance premiums, which shift to a landlord policy providing coverage for rental risks. Maintenance and repair costs are also significant, with experts suggesting budgeting 1% to 4% of the property’s value annually. Additionally, potential vacancy periods and any homeowners association (HOA) fees must be factored into financial projections.

Property management offers the choice between self-management and hiring a professional company. Self-managing requires time and effort for tasks such as tenant screening, rent collection, and addressing maintenance issues. Professional property management companies typically charge 8% to 12% of the gross monthly rent for their services, handling these responsibilities and offering expertise in landlord-tenant laws.

Thorough tenant screening helps mitigate risks associated with renting a property. This process involves collecting rental applications, performing credit and background checks, verifying income and employment, and contacting previous landlords. A comprehensive lease agreement is important, outlining the terms and conditions of the tenancy, including rent due dates, maintenance responsibilities, and rules regarding property use.

Tax Considerations for Homeowners

The tax implications for selling or renting a home are distinct and can affect the financial outcome. When selling a primary residence, homeowners may qualify for a capital gains exclusion. Single filers can exclude up to $250,000 of gain, while married couples filing jointly can exclude up to $500,000, provided they have owned and used the home as their primary residence for at least two of the five years preceding the sale. This two-year period does not need to be consecutive.

Periods of “non-qualified use” can reduce the exclusion amount. This refers to any period after 2008 when the home was not used as the taxpayer’s main residence, such as when it was rented out. The gain allocable to these non-qualified periods may be taxable. While most home sales meeting the exclusion criteria do not require reporting to the IRS, any gain, even if excludable, is typically reported on Schedule D of Form 1040.

For homeowners choosing to rent out their property, rental income is taxable and must be reported to the IRS. Landlords can deduct ordinary and necessary expenses incurred in operating the rental property, which can reduce their taxable income. Common deductible expenses include:

Mortgage interest
Property taxes
Insurance premiums
Utilities (if paid by the landlord)
Repairs and maintenance
Advertising costs
Property management fees

Depreciation is a deduction for rental properties, allowing landlords to recover the cost of the property and improvements over its useful life. This non-cash deduction can create a paper loss for tax purposes even if the property is generating positive cash flow. Rental activities are generally classified as passive activities by the IRS, meaning that losses from rental properties can typically only offset other passive income. Record-keeping of all income and expenses is important for rental property owners to accurately report their finances and support deductions.