Renting a Residence - 7/07/08

INTRO: If you sell your home in today's market, you're likely to take a huge financial hit.  So does it make sense to rent your place for a year or two.  While you wait out this downturn? 

1. AREN'T THERE SOME NICE TAX BENEFITS WHEN YOU RENT OUT A HOME?

A. Yes.  You must report rent as income on your tax return, but you can deduct expenses, including costs of maintenance, insurance, mortgage interest, real estate taxes, repairs and utilities.  And you can get a deduction for depreciation.  The depreciation deduction reduces any taxes you might have to pay on rental income, and it may also offset taxes on your wages.

But the depreciation deduction probably won't be huge.  On a $100,000 home, the deduction is about $3600 per year.

2. WHAT HAPPENS WHEN THE HOME IS SOLD?

A. If you rented the home for less than 3 years, you won't pay capital gain tax on the profit you make, just as if you were living in the residence.  But if the rental was longer than 3 years, then you will pay tax on the home sale profit at the capital gain rate of 15%.

Plus, when you sell, even within 3 years, you'll Arecapture@ the depreciation and pay tax on the profit up to the amount of the depreciation.  So the depreciation deduction really isn't worth much.

3. CAN YOU GIVE US AN EXAMPLE?

A. Sure.  Let's say you rented the home for 2 years, and took a depreciation deduction of $7200.  When you sell, you'll have to pay income tax on the $7200.  So the benefit of the deduction isn't much.

4. WHAT OTHER TIPS ARE THERE FOR RENTING A HOME?

A. One is liability.  When you open your home to a renter, you're opening yourself to possible lawsuits.  If the renter trips on a broken step, or is hurt in an electrical fire, you, as the owner, are likely to find yourself on the wrong end of a lawsuit.

Another major trap is the personal one of becoming a landlord.  Do you really want to get calls at 3 in the morning because the hot water isn't working?  And a renter will never have the same pride of ownership and interest in keeping up the home.  I've seen lovely homes just trashed by renters who really didn't care much about how they left the property.

5. WHAT IF THE RENTER WON'T LEAVE WHEN HIS LEASE IS UP?

A. That's another problem with rentals.  The only way to force a renter to leave is by bringing an eviction lawsuit, which can take time and cost you money.  And if the renter doesn't get out for a month or two, you'll probably lose that rent.

CLOSE:  Renting your home when you can't sell it may seem like a good idea.  But make sure you understand what you're getting yourself into.