Renting your unsold home may be an option

Q:

We put our home on the market last spring and, despite several price reductions, have had no luck in selling it. We want to move on and are thinking about renting it. What are some of the things we should be thinking about if we rent?

A:

Sellers who have had their homes on the market for a while without success often start to think about alternatives. And renting the home is an excellent alternative, especially now with the rental market booming.

Obviously, renting your home only makes sense if you have another place to live. If you have to relocate for employment, have a second home where you can stay or perhaps have another person to move in with, then renting may be a good option.

On the plus side, renting enables you to keep your property until the market stabilizes and prices start to go up again. In the meantime, the rental income can cover the mortgage, taxes, insurance or at least a good portion of those expenses. You will also be able to deduct certain expenses related to repairs and maintenance to the home from the rental income.

But there are also many headaches involved in renting a property. Renters may fail to pay the rent. They may break or destroy things or do other damage to the home. 

And just because you no longer live in the home doesn’t mean you no longer have to maintain it. You may be called in the middle of the night for everything from no heat, to a leaky roof or faucet, or a stopped-up toilet. Depending on the issue, you must be able to respond immediately or face the prospect of being hauled into court and sued.

Evicting tenants can also be a long and costly court procedure. Even obvious reasons for eviction may involve the courts.

You also need to think about the tax consequences of renting. The federal government provides a very generous tax exemption for sellers of a primary home, which is not available on the sale of rental properties.

If you sell a primary home you can exempt up to $250,000 from capital gains taxes ($500,000 for married couples). There is no such exemption on the sale of rental properties. To qualify for the exemption, you must live in the home as your primary residence for at least two out of the last five years.

Before renting your home, you should investigate your rights and obligations as a landlord. Consult an eviction attorney.

Also, interview property managers. They will take a percentage of the rental income for handling landlord duties, but it may be worth it.

Create a budget of all the expenses you will incur in renting the home. Will the rental income cover the budget?

Renting can be a good option for sellers as long as they know what they are getting into and don’t throw away that big tax break at the end.