This is the first part of a 2-part blog post that discusses the decision many homeowners face in today’s market. Part 1 discusses advantages and disadvantages of selling and renting. Should You Sell or Rent Your Home? (Part 2) talks about the 3 factors you must consider to determine the best option for your situation.
Many homeowners in the Memphis area are unable to sell their homes for a reasonable price. This situation puts significant financial and emotional burdens on many families.
Some families have already moved out, but continue to make payments on a vacant home nobody is benefiting from. Other families are “held hostage” by their home and cannot move on with their lives until their home sells.
At some point, most homeowners in this situation think about renting out their home as a potential solution to their problem. But renting is not for everyone.
So when is renting a better option vs. waiting for the home to sell?
Let’s start by looking at the advantages of selling:
- Can give you peace of mind: If you no longer need your home and dislike the idea of keeping it as an investment, selling your home will likely give you the peace of mind of knowing you don’t have to be concerned with tenants, maintenance, vacancy, and other home expenses.
- Can produce cash: If you have equity in your home, selling will unlock your equity without borrowing. Having cash on hand can be useful (although not essential) to purchase another home.
- Can be a tax free move: If you have lived in and owned your home for at least 2 years out of the last five and can sell at a profit, you may be able to benefit from section 121 of the Internal Revenue Code which allows you to exclude up to $500,000 from your taxable income connected with the sale of your home. You can still take advantage of this exclusion if you sell within 3 years of moving out. Consult your tax advisor for more information.
The main disadvantage of selling in today’s market is that you may have to sell at a loss. Also, if you have located the ideal home for your family, waiting to sell your current home can result in your losing the opportunity to buy that ideal home.
Now, let’s talk about the advantages of renting:
- Can be more profitable in the long run:
- Renting your home for some time can be more profitable than selling it in today’s depressed market since good homes will likely appreciate over the long term.
- Even if homes do not appreciate, the fact that the tenant is paying down your mortgage will likely result in a larger profit when you sell.
- Rents from your home can supplement your income, especially after the mortgage is paid off.
- In many cases finding a good tenant is easier than finding someone to buy your home and cash you out. This translates into lower expense if you are dealing with a vacant home.
- Can provide tax benefits: Owning rental property can provide tax benefits that lower your taxable income and thus how much tax you pay. Also, if you are faced with selling a home at a loss, converting it into rental property could allow you to write off the loss against your income, which would not be possible if you sold it as your personal residency. Make sure you discuss your situation with your tax advisor to understand how these things would apply to you.
- Can help you move on with your life faster: Since renting a home takes less time and financial resources than selling it, you can move on with your life faster if you rent. This means you can join the rest of your family if they have already relocated or take a job offer if you have been waiting to sell. Keep in mind that the fact that you own a home does not necessarily mean you cannot purchase (finance) another one. The income from your rental home may help you qualify for a loan to buy the new home.
The main disadvantage of renting is that you do not get relief from the responsibility of owning a home (payments, maintenance, etc.). This, however, can be mitigated with good tenant and property management practices.
In Part 2, we’ll discuss 3 factors to consider before you decide to sell or rent your home.
What are other reasons to sell or to rent? Please post your comments below.
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