Here at Turnkey Properties, we know that owning residential property comes with a lot of questions. One of the biggest is what to do with it! That is, should I rent or sell?
Whether to rent or sell is a significant decision that requires careful consideration. In the following, we will discuss some factors to consider when deciding whether to sell or rent your property. Both options have advantages and disadvantages, and you can make an informed decision by understanding these factors. Read on to learn more!
Pros and Cons of Selling vs. Renting
There’s a lot to consider when deciding whether to sell or rent your property! One of the most important considerations for any property owner will always be taxes. How does my decision affect the way my property will be taxed? Well, let’s get into it.
Tax Implications of Selling vs. Renting
Tax considerations are always significant when deciding whether to sell or rent your property. When selling a property, it’s essential to consider the implications of the capital gains tax. Homes lived in for two of the last five years have tax breaks that allow you to avoid capital gains taxes. A married couple that files jointly can have up to $500,000 in tax-free capital gains, and singles can have $250,000 in tax-free capital gains if the property in question was their primary residence for two of the last five years. Renting out a property can discourage some people from selling because they may be subject to these taxes.
One solid piece of advice is that if your residence has a significant gain, it is better to sell the property rather than rent it out unless you plan to move back in for two years after renting it out before selling it.
There are also tax issues to consider when renting out a property. Many people aren’t aware of this, but being a landlord can have some tax perks! For instance, did you know that numerous deductions associated with renting out a property can eliminate any taxes on rental income?
You can deduct out-of-pocket expenses associated with owning and managing a rental property, like property taxes and mortgage interest payments. Advertising, broker’s fees, costs of repairs, and maintenance expenses are also deductions! However, it’s crucial to consider capital gains, and any value that you have depreciated from the property will also be taxed. Depreciation is another significant tax deduction associated with renting, and the recovery period for residential rental property is 27.5 years. You can deduct around 3.5% of the property’s value from your annual tax bill. However, you cannot deduct the cost of improvements to the property, but you can use depreciation to recover these costs. This can be a drawback for many homeowners because they carry the burden of the costs upfront and can only recuperate a small amount in their tax deductions each year. Owning rental properties essentially means running a business, and as such, you may qualify for several tax deductions. These include expenses such as membership in your local Real Estate Investor Association, continuing education related to real estate, deduction of home office space, and travel costs associated with visiting your property, among others.
Costs of Selling or Renting Your Property
The cost of renting a property will affect your decision to rent or sell. For many homeowners, the price of carrying a property is too high, and renting it out is not an option. Selling their current property can help raise the capital required to purchase a new home. The cash reserves needed to own more than one property are also high. Cash reserves are necessary for any rental property because there are periods when rental properties are vacant, tenants do not pay rent or other factors that affect cash flow, but you’re still on the line for the mortgage payments. You should also consider any damage or other issues that are likely to incur costs. For instance, the eviction process can be very costly and time-consuming, and the tenant may refuse to pay rent during the eviction process. Damaged property is another cost, but landlords can protect themselves from these costs by requiring a security deposit. The landlord is responsible for other general expenses as well, such as replacing broken appliances, replacing carpets, painting, and other general maintenance costs.
Becoming a Landlord: Selling vs. Renting for Your Lifestyle
Another major consideration when it comes to the question of selling vs. renting – do I want to be a landlord? Becoming a landlord means taking on a significant responsibility. As a landlord, you’re on call for repairs at any time of the day—and it seems like they happen at the least opportune times! One great way to alleviate this particular drawback is to hire a property manager. However, it’s important to consider that this is an additional expense and needs to be calculated into the final financial considerations.
When it comes to answering whether I should sell or rent my house, selling may be the best choice if becoming a landlord is a stressful idea, but if you are interested in becoming a landlord, renting may be a great choice. Before taking on the burden of managing a rental property, it is advised that you do some research and educate yourself on the process of renting a home and study the local laws regarding rentals. Keeping up with state laws for rental properties can be a challenge, but if you are dedicated to renting out your property, it can be done. In the end, the decision to rent out or sell your home is a personal one. The right choice for you may be different from the right choice for your friends or family, and the best way to make this decision is to weigh out your personal situation.
No matter what you decide, Turnkey Properties can help you make the most out of your property. Our skilled team has decades of experience leveraging properties in Memphis and Little Rock to provide our customers with maximized profits for minimal time commitment and hassle.
Let us handle the hard stuff! You’ll be glad you did!