Posted by Yvonne Long on January 29, 2009 at 12:06am
Here is some information I found that will help you make and educated decision! Be Blessed!Should You Rent out Your Home or Sell It?Four months ago, Darleen Burbridge, a 41-year-old hotel office manager from Staten Island, N.Y., was laid off. Now, after fruitlessly pounding the pavement for the past few months, she's decided to relocate to Florida. She figures that Florida offers better job opportunities in the hotel industry, a more affordable standard of living and -- let's face it -- better weather.But one question remains: Should she sell her two-family suburban home or rent it out?"I don't know what's better financially," she says. "Should I sell and take the profit and run? What if I go to Florida, hate it and come back? I won't have a house. I've heard horror stories about people who sell their home when they move, then come back and can't even afford an apartment." In her case, the stakes are high: The home she bought for $235,000 is now worth an more than $400,000. Selling now will lock in her sizeable gains, but could price her out of the market if she returns in a year or two.Burbridge's situation isn't unique. As many as 5,373 Americans move every day, according to the U.S. Census Bureau. And these days, given the weak labor market, many are moving to find jobs. According to a survey by the career Web site Monster.com, almost half of U.S. job seekers were willing to relocate for employment.Of course, in most cases, moving means selling one's home; after all, it's usually a necessary step in affording a new home. But for various reasons some people choose to rent out their homes instead. In some instances, people know that they'll be leaving only for a year or two, perhaps while they pursue a graduate degree or take on a specific project at work. Sometimes the would-be seller simply can't sell at a price deemed acceptable, so he or she chooses to hang on until the market picks up. Others just want to keep their old home until they're confident they won't be coming back.Whatever the reason, it's important to have a healthy grasp of the financial issues at play when weighing this decision. Here's what you need to consider.The Tax Issues When You SellAs you probably know, Uncle Sam provides a generous tax break for those who've lived in their home for at least two of the past 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.Good news: Those who are planning on renting out their home for just a year or two will still be eligible for these breaks (provided they've lived in their home for at least two of the past five years). Should they sell more than three years later, however, they forego the tax exemption, meaning their gain would be taxed as a capital gain. "Once you start renting, the clock starts ticking on these two out of five years," says Robert Weinberg, a certified public accountant (CPA) in Orange County, Calif.Consequently, for those whose renting plans would turn a tax-free gain into a taxable one, the general advice is to sell. "The rule of thumb is, if you have a large gain on your personal residence, you don't want to rent it out," says Benjamin Tobias, a CPA and president of Tobias Financial Advisors in Fort Lauderdale, Fla. "You never want to take a house that you're not going to have to pay tax on and convert it into rental property and pay tax on the gain. That's insane." One solution to this problem: If you're willing to move back into the house and live there for two years before you sell, you'll re-qualify for the exemption.The Tax Issues When You Rent OutBecoming a landlord also offers some handsome tax perks. While rental income is taxed as ordinary income, your tax bill could easily be eliminated thanks to the numerous deductions on expenses and depreciation. There is, however, one major exception: If you eventually sell the house and qualify for the capital-gains tax exemption discussed earlier, you'll be taxed on the amount you depreciate, which could make renting out your home considerably less attractive.Let's talk expenses first. You can deduct pretty much any out-of-pocket expenses related to owning and managing the property, Weinberg says. This includes your mortgage interest payments and property taxes (same as if this were your primary residence). It also includes other expenses, including advertising or broker fees, the costs of repairs to the property, maintenance expenses such as cleaning services, utilities and management company fees, the cost of fire and liability insurance, and even travel and local transportation expenses incurred for the maintenance of the property and collection of rent.Then there's the "phantom deduction" called depreciation. Just divide the fair market value of the property at the time you start renting it out (excluding the cost of land) by its recovery period -- which is 27.5 years for residential rental property. There's your annual depreciation. For example, if the home is worth $550,000, you divide that by 27.5 and get a $20,000 annual deduction. "The depreciation deduction will cover a lot of the rental income you're receiving, so it's a nice tax shelter," says Jeff Callahan, a CPA with Bederson & Co. in West Orange, N.J. "If you have another $10,000 in out-of-pocket expenses, which are also deductible, you can get $30,000 in rent tax-free," he says.Improvements can't be deducted, but you recover their cost by depreciation. The good news is, you typically depreciate the cost of any appliances, carpeting, furniture or plumbing over only five years, says CPA Weinberg. So if you bought a new $1,000 dishwasher for your rental, you can deduct $200 a year from your rental income for five years.article By: Aleksandra Todorova, www.smartmoney.com
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