By Peter G. Miller
Question: We're both retiring during the coming year and want to downsize. Does it make sense to sell our current property or keep it as a rental?
Answer: You need to consider the real estate market where the current property is located, alternative financial options, and your personal preferences.
The first issue concerns the financing of your current residence. Does it have a mortgage? If you do not have a mortgage, it means more of any potential rental will go to you and also that if you sell, there will be a bigger check at closing.
A big attraction of selling is that resolves all current house issues. What you get at closing belongs to you and what happens to the house thereafter is the concern of the new owners.
Current federal tax rules generally say you can shelter $250,000 in profits ($500,000 if married and filing jointly) if the property you sell has been occupied for two of the past five years as a main home. If you rent the property for enough time, you can lose this advantage and be exposed to a large tax bill.
A big catch here is that tax reform will get serious consideration in Washington during the new Congress. For details be sure to speak with a tax professional.
Local real estate patterns also will influence your decision. Are local prices and rents generally rising or falling? The National Association of Realtors says in the third quarter of 2016, home values rose in 155 out of 178 metropolitan statistical areas. However, prices also fell in 22 areas. What prices will do in the future is unknown. As they say on Wall Street, past performance does not guarantee future results.
Do you want to hold onto the property and be in the rental business? This is not a casual decision, especially if you are moving out of the area and a pipe leaks. It's best to have a local manager who can oversee the property for you.
If you sell your current home the dollars you get at closing may be enough to finance a replacement property, allowing you to live mortgage free.
If you rent, you will hopefully get a monthly check plus you will have the ability to shelter some of your income because of depreciation. Renting, in the best case, can produce a nice steady income to complement your other retirement funding.
Another choice is to rent the property and refinance. In this way you can get a rental income, financing at today's rates, plus the ability to depreciate the property. The amount you borrow may allow you to buy a replacement property for cash. Speak with lenders and tax professionals for details.
- Category: Real Estate