The real estate market can be a tricky industry to navigate, especially for those who do not have a lot of experience in the area. The sale of a home may be the result of the homeowner relocating, upgrading, a change in finances or any number of other factors. In some cases however, a homeowner must consider whether selling their home is the best choice or if they might benefit more by renting the property to tenants. There are several pros and cons associated with each option, therefore it is important to consider all potential consequences before making a final decision. Here we look at some factors to consider when comparing both options.
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Remember Your Home Is An Investment
Your house is an investment and any decision you make regarding the handling of that investment should be based on sound investment principles. This is sometimes a challenge for homeowners who allow too much emotion to guide their decision. When the time comes for you to move onto another location or property, your decisions regarding your house must be made based on how it will affect your finances.
How Uncle Sam Views Selling Versus Renting
For qualifying homeowners, one tax law allows for 100% tax-free on the profit resulting from the sales which can be a significant amount of money that could be used toward the purchase of your next home. To qualify the homeowner must have resided in the residence for a minimum of two out the past five years.
There are also tax benefits to renting a property. In addition to a steady stream of income from rental payments, homeowners are still permitted to deduct mortgage interest, property taxes, and any other expenses that result from operating and maintaining the property. Net losses may also be deducted from the homeowners gross income, usually up to $25,000.
Homeowner’s Financial Situation
For many homeowners the decision to sell or rent will be based on their own financial situation. Owning and maintaining more than one property requires serious cash resources. This must be considered by homeowners who may be considering renting their property because they don’t want to take a loss in the current real estate market. It is important to determine if the expenses you must incur in order to maintain both the rental and your new residence are worth the profit you might realize by holding onto the property and selling in a better market.
Are You Landlord Material?
Not everyone is cut out to be a landlord. Renting a property involves much more than simply handing over the keys and collecting rent each month. You must be able to handle any maintenance issues that arise, tenant complaints and other landlord-tenant issues. There are also certain laws that you must understand which vary from state-to-state to ensure you are working within the bounds of those laws.
A Sunmmary of the Pros And Cons
Looking at both options renting and selling, the following is a breakdown of the pros and cons of each.
Pros of selling include
- rolling over or freeing up equity that can be applied toward your next residence
- tax-free capital gains to those who qualify
- the simplicity of maintaining only one property
Cons of selling include
- the loss of potential appreciation of property
- taking a loss on that property if selling in a bad market
Pros of renting out include
- benefiting from property appreciation
- benefiting from certain tax breaks
- a steady stream of income from rental payments
Cons of renting out include
- potential problems with tenants
- loss of tax-free capital gains when selling
- property damage
- a large cash commitment to more than one property