Leasing When You Can't Sell

Question:  I have been trying to sell my home for quite a while. When is it time to consider renting it out instead?

Real estate markets often cycle through strong and weak periods. During a strong period it is relatively easy to sell a home (sometimes called a "seller's market"). There are times, though, when selling a home can be more difficult due to the strong supply of properties in the market, the economy or changes in mortgage rates, among other reasons. Many people think about renting out their homes under these conditions - especially if they have plans to buy a new home and are concerned about carrying two mortgages.

If you need the equity from the sale of your present home to make the down payment on another property, then leasing may not be a good option unless you have another way of securing funds for the down payment. And there are tax advantages when you sell your home that you may not get if you rent it out and then sell it later.

When you sell your home, U.S. tax laws provide for a generous tax break for those who've lived in their home for at least two of the previous five years. Married couples who file jointly can earn up to $500,000 in capital gains tax-free, while singles can enjoy $250,000 in tax-free gains.

If you are planning on renting your home for just a year or two, you will still be eligible for these breaks (provided you have lived in the home for at least two of the past five years). Selling a property after more than three years as a rental could mean paying tax on all the capital gains you achieve from the sale. Consequently, for those whose renting plans would turn a tax-free gain into a taxable one, the general advice is to sell.

When you simply can't sell your present house - or you want to retain ownership of the property for possible personal use in the future or because you expect the market to improve and you are willing to wait to make a bigger profit - then renting it out becomes an attractive option. You may be able to generate a steady income from the property that exceeds the cost of the mortgage and maintenance expenses, thus providing you with excellent financial rewards.

As a landlord, you are entitled to quite a few tax deductions including those for mortgage interest, property taxes and costs associated with operating and maintaining the property. The cost of insurance premiums, repairs and depreciation may be deducted from rental income.