If you’re moving to a new home and deciding what to do with your current place,
you’re probably facing the dilemma of whether to rent out your home or sell it.
Each option has its pros and cons, and depending on your circumstances,
choosing to rent or sell could have serious consequences on your finances and
ability to maintain your current lifestyle. Below are three questions that will
help you make an informed decision.
1. What Kind of Taxes Can You Expect?
Whether you’re selling or renting, you’re going to have to deal with taxes.
Selling
– Selling your home means paying capital gains tax. But there are tax breaks
for sellers who have lived in their homes for at least two of the last five
years, allowing you to avoid any taxes altogether.
– Married couples who file jointly can enjoy up to $500,000 in tax-free capital
gains, while singles can have $250,000 in tax-free capital gains, provided the
home was their primary residence for two of the last five years.
Renting
– Landlords can also avail of a number of tax perks. For example, deducting
the costs of renting out a home can eliminate any taxes on your rental income.
These include the expenses associated with owning and managing the rental
property, such as mortgage interest payments, property tax, advertising costs,
repair and maintenance expenses, and broker’s fees.
– Depreciation is another tax deduction you should consider when renting out.
Residential rental properties have a recovery period of around 27 years,
allowing you to deduct roughly 3.5 percent of the property value from your
yearly tax bill.
2. Can You Afford to Rent Out Your Home?
Renting out your home can be a great way to generate passive income, but you need to ask yourself if you can afford the cost of doing so.
Many homeowners simply cannot afford to carry a home, eliminating any possibility of renting it out. If you don’t have the cash reserves to own two properties at the same time, renting is probably out of the question. Having some buffer money is especially important for times when no one is renting your home, the tenant does not pay rent, or when you’r facing cash flow issues.
3. What’s Your Cash Flow and ROI Going to Be Like?
Speaking of cash flow, when you deduct all of the expenses of owning and managing the property (e.g. taxes, insurance, management, repairs, and HOAs) and find that you’re not generating a monthly profit, you’re better off selling the home instead.
And even if you’re generating a profit, consider your ROI. For example, if you could generate $100,000 from the sale of your home and would only get a cash flow of $1,000 annually, that’s an ROI of only 1 percent. It’s smarter to take the $100,000 and invest it someplace else with a better return.
If you need to sell your current property right away to pay for your new home and moving expenses, you can sell it as is in no time to Blue Hen Homebuyers. As an investor, we buy all kinds of homes, regardless of their age or condition. Call our offices today at 910-802-2222 to learn more about how we can help you.