Property Management Blog

Should I Rent or Sell My Home? (Part 1)

System - Monday, May 29, 2017

Selling the property may make sense in some cases, but you may end up missing out on tax benefits. When you rent your home, you are basically using tax-free money to cover the costs of an appreciating asset. If you do your taxes the right way, you can essentially earn tax-free cash from your rental property as it appreciates. If your rent amount does not completely cover the mortgage payment, please read through this article as we may have some answers for you.

When you choose to rent the home instead of selling it, you can depreciate it for tax purposes. Normally, you divide the amount you paid for the home, plus the costs of major improvements and minus the land's value, by 27.5. The final figure is how much the tax law will let you depreciate the home yearly on your taxes.

In a basic example, let's assume that you bought a home for $200,000. The land is valued at $60,000. The depreciation formula would look like this: $200,000-$60,000=$140,000. Then, $140,000/27.5=$5,090. When you file your taxes at the end of the year, you get to remove $5,090 from your gross rental income for depreciation. This means that $5,090 is completely tax-free. When you deduct for the other expenses associated with the rental property, the tax-free part of your rental income can go even higher.

Now, assume that you make $12,000 a year in gross rent. The $5,090 is removed from this amount. Your income is now just $6,910. Once you account for costs like HOA fees, maintenance costs, mortgage interest and management expenses, your taxable net income is reduced to a small amount. In many cases, it can even be reduced to nothing. When the conditions are perfect, your gross rental income will cover all of the carrying costs associated with the property. There are few others investments or jobs that you could take that would make you $12,000 without paying taxes. While the asset appreciates, you get to enjoy tax-free money.

In some cases, the rental income may not cover all of your expenses, which would be one of the reasons why you would want to sell. It is possible to make up these losses by waiting for the home's value to rise. With your $200,000 home, we will assume that you have $1,000 more in expenses than what you collect. In five years, you would lose $5,000. If your property appreciates by a conservative 3 percent during the same time period, the value will reach $230,000. You get a net gain of $25,0000, and your annual losses are completely covered.

If you are just looking at the money you spend and save with your property, it will generally make sense to hang onto your asset instead of losing money by selling it. We have great forecasting models available that can help you predict how selling or holding the property will impact your finances. In many cases, it makes financial sense to hold onto the property and wait to sell it in the future. Please feel free to schedule an appointment with us to take an in-depth look at a probable future.