I am thinking about renting out my Homestead.
What are the pros and cons?
Not ready to sell your home yet and considering renting it out in the interim? We put together a short list of pros and cons to help you weigh your options.
- Renting can provide you with extra income, as long as the rent is higher than the mortgage payments and other expenses combined. You do need to set aside funds for any repairs that may be needed down the road.
- Keep property to sell later at a better price, as long as your tenants take good care of the property while living there and the market doesn’t shift or crash.
- Tax breaks offset rent or other income. Some rental expenses you can deduct may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We recommend consulting with your CPA on this.
- As many learned from the real estate bust, houses don’t always go up in value, and can even go “under water” meaning you owe more than the property is worth.
- Market rents fluctuate, and your property may produce less rental income than you anticipated or even sit vacant for several months, causing financial strain.
- You are the landlord and are responsible for repairs and maintenance the property needs. No way to predict when a call may come in and you are having to drop everything to get something fixed. You can hire a property manager to handle this, but that does come at a price.
- Tenants may damage your property. Unfortunately this happens more often than you would expect. Tenants do not care for the home as they should and treat it badly. Leaving you with 1,000’s of dollars in repairs needed after they leave just to put new tenants in place or sell the property. This can be a shocking and unexpected expense.
- Rent isn’t guaranteed and if an eviction is necessary it is not a cheap and quick process.
- You could be taxed on gains if you sell later. If you plan to sell a home you’ve converted into a rental property, you should be aware of how the gains could be taxed. If you lived in the property for at least two years ,then rented it out for less than three years, you may be able to still use the provision that allows you to exclude up to $500,000 of gains tax free. However you will still have to pay income tax on any deductions you claimed for depreciation while renting it out. If you sell the property and it has been rented out for 4 or more years you will be responsible for capital gains tax that is a tax rate of 15% – 20% depending on filing status and taxable income.