WASHINGTON Nov 8 Once a homeowner retires or
takes a new job in another state, it usually doesn't take long
for the "For Sale" sign to pop up on the front lawn.
Years of housing market turmoil have done little to change
the conventional wisdom that it's best to sell when you go.
But that doesn't work for everybody. With home prices still
14 percent below their peak, according to Federal Housing
Finance Agency data, some homeowners would have to take a loss
to sell their homes. Others who have held their homes for many
years would probably profit if they sold, but they aren't ready
to make that permanent commitment.
For homeowners in both categories, it might make more sense
to rent out the home for a few years rather than to sell it. But
it's not a simple endeavor.
"It makes sense to rent in an area where property values are
depressed," said Jerry Gross, with the accounting firm of
Osterman, Pollack & Moses, LLC, in Bethesda, Maryland. In most
cases, it makes financial sense to rent if the rent can cover at
least 80 percent of fixed costs such as mortgage payments, taxes
and insurance, said Gross, a certified public accountant and
personal financial specialist.
The other 20 percent can often be taken as a tax loss and
deducted against other income.
In its latest forecasts, the National Association of
Realtors predicted prices of currently owned homes would
increase 9 percent this year and 5.3 percent next year. Done
right, it may pay to rent and wait to sell.
A FORM OF DIVERSIFICATION?
When Sue and Michael Thaler retired to Florida in 2008, they
were in a position to profit on their four-bedroom, two-bath
home in Arlington, Virginia. But they weren't in a hurry to
They thought they might want to return to the Washington
area, either permanently or occasionally to catch up on local
culture and see friends. They also thought that holding on to
their home as an investment would help balance their stock-heavy
retirement portfolios. So even after they bought a co-op in
Briny Breezes, Florida, they kept renting out their home.
They advertised it on Craigslist and were hoping for an
academic tenant who would vacate the home so they could return
for the summer. But that isn't what they got.
"We ended up with people who wanted to rent year around on a
permanent basis, (and) four roommates, which was my lowest
priority on my wish list," Sue said. But four years later, two
of the original tenants are still there and the Thalers say they
are happy with the arrangement.
RENTAL EXPENSES, BENEFITS
There are financial benefits to being a landlord.
Rental income is taxable, but there are deductions landlords
can take against that income, Gross said. Homeowners can deduct
mortgage interest, property taxes, insurance, utilities not paid
by the tenant and prorated portions of the money spent to buy
and improve the house, known in the tax trade as depreciation.
Those deductions can sometimes produce a loss that can
offset other taxable income, but the rules are complex and the
tax losses may be limited by factors like the owners' income and
involvement with the property.
There are some other advantages to renting. Any trips back
to the city where the rental property is located, including
meals and other expenses while you are there, are deductible if
the trip is for such purposes as finding and interviewing
tenants and upkeep of the property.
But unless you time the sale of your home carefully, you can
negate all those benefits by losing the capital gains tax break
that only resident homeowners get to take.
When a homeowner sells a home, he or she typically owes
capital gains taxes of as much as 20 percent on the profit - the
difference between the sale price and the amount of money paid
for the home. Owners who have lived in their homes for two of
the previous five years can exempt up to $250,000 ($500,000 for
couples filing jointly)from that tax. So homeowners who move out
and rent out their home have to make sure they either sell it
within three years or move back in and live in it again before
they sell it in order to keep that tax break.
LONG-DISTANCE PLUMBING REPAIRS
Gross, the accountant, also cautions would-be landlords that
"not everything is based on economics."
Being a landlord in the same city is challenging enough,
with having to deal with vetting tenants who will live in your
home and managing maintenance and repairs. But doing it remotely
is even more challenging.
"You may not want to be an absentee landlord," says Gross.
It can cost between 10 and 15 percent of the rent to hire a
property manager. But that's an investment that could be well
worth making - especially when the plumbing fails or the
dishwasher breaks and the landlord is sitting on that Florida
beach, or sleeping.