Renting Vs. Selling

[Julss05]

DH and I are thinking about renting instead of selling our 3 bedroom townhouse we've been in for 7 years. I would prefer to sell but have noticed other townhouses in our neighborhood not selling until they drop their price way below asking. Some selling $40,000 less than comparable places a year or two ago. While we have a good amount of equity in the house and would still make a profit if we sell for much less it doesn't seem logical to do that when I'm sure home prices will go back up eventually. The appraised value has gone up approx. 20% per year. At the same time we would like to take advantage of the current low home prices to get into another home since we have outgrown this place. We'd like a garage, more storage space, nicer neighborhood, and bigger backyard for future family. I have a few friends who have rented their homes to buy another place and none have had great experiences even when using an agency so I'm a bit concerned about that. Right now it seems like the only option. Anyone else decide to rent their house to buy another and then sell their first home later after prices go back up? What do you need to do to get the house rental ready? Any tax breaks on renting? I ask because DH mentioned something about not having to pay taxes if we sell within 3 years of renting. I'm just curious if it is worth the hassel. If we wait for home prices go back up we'll also be paying more to get into another home ourselves which I'm not sure we could afford. I'm confused as to what to do.:confused: Sell and take a big cut, rent our townhouse for a few years, or stay where we are at and risk paying a lot more for our next home even though we'll make more off ours?

[villanelle75]

I ask because DH mentioned something about not having to pay taxes if we sell within 3 years of renting.

I think I can help with this. I am not a tax expert, but I believe that you can avoid paying capital gains if you have lived at the property for 2 of the last 5 years. So if you sell three years after you move out, you are still fine. That's my understanding, anyway. An expert can clarify or confirm. WRT other tax advantages, my understanding is that you can write off any improvements and you can also depreciate the value of the property over 30 years and write that off each year. HOA dues might even be a write off.

We are considering keeping a property as a rental as well. Our situation is different in that we would be moving overseas for 2-3 years. Values are down only slightly in our area but homes are taking a very long time to sell. Those issues, added to the fact that we would almost definitely be returning to this area at the end of those 2-3 years, make us want to keep the place and rent. Plus, we don't want to sell and the be priced out of buying something even equivalent to our place, should values rise greatly (as they are apt to do in SoCal). The idea of being an overseas landlord scares me, and by the time we paid the mortgage, property taxes, HO insurance (which will be much less if the place isn't owner-occupied), and a property manager means would wouldn't break even, but in the longer term, I think it makes sense.

[mamax2]

I ask because DH mentioned something about not having to pay taxes if we sell within 3 years of renting.
Does he mean capital gains or taxes in general? You still have to pay general property taxes and such. Also, keep in mind that there are tax implications in terms of credits and such that ONLY apply to your principle residence.

Just curious, what makes you so sure home prices will go back up significantly? For all intents in purposes, we are in a neutral market. We were in a boom market and saw skyrocketing appreciation and market values, but that's an exception, not the norm. I think anyone who expects to see values increase exponentially in the near future is in for an unpleasant surprise.

Economic conditions are very cyclical, which I'm sure you know, but the cycle is long. You may not see the market value of your townhome come back up to the 2003-2005 levels for quite some time, and like you said, if/when that does happen, you'll be looking at a seller's market across the board. Plus, who knows what's going to happen with interest rates? It's an excellent time to be a buyer. If you can get into something else and walk away with equity, I'd take it.

[WestieMomma]

We are thinking about doing this as well with our current home for pretty much the same reasons you listed. We just put ours on the market on Mon. for sale but after 6 weeks if we don't have many showings or any offers we are going to put it for sale or rent. If we do end up renting it out we are going to use a property management co. to manage everything because we don't have the time to deal with tenants.

[hmbay]

We did this for a year. We couldn't find buyers before we had to close on our new house so we took out a HEL against house1 for the downpayment on House2. Put renters in for a year at a rent that just covered the mortagage on H1 and the HEL (1 year ARM). At one year the renters didn't renew the lease and HEL rate skyrocketed (we knew this could happen but we took a risk on it and it didn't pay out for us). It took us another 8 months to fix up what they trashed and get it sold during the winter months (bad selling time around here). In the long run honestly I don't think it was worth our hassle. We didn't get that much more for H1 after you figure we had to pay two mortgages and a HEL for 8 months and do a lot of manual labor/cleaning, painting and replace half the carpeting (needless to say they did NOT get their damage deposit back).

As for renting what you need to do to make it all legal and good is call the city and let them know you'll be renting it (and check with your association to make sure they allow rentals--some do not). They will come and inspect the property and let you know what has to be up to code for a rental property--things that need to work (doors, windows, appliances etc), things that need to exist (handrails, smoke alarms in all bedrooms), general safety violations. You will need to fix anything they come up with and then re-inspect before you can move in a tenant. You will also have to pay a rental license fee. You can find standard lease forms at office supply store or online. For doing your taxes our accountaing just had us claim the interest and property taxes on that house as deductions and the rent we received as income. It more or less balanced itself out tax-wise.