You’re moving, you own the house, and you like the rate on your mortgage, so renting it out instead of selling is tempting.
The example here is a house worth $350,000, with $180,000 left on a 3.25% mortgage that has 20 years to go. It would rent for $2,300 a month.
What would renting it out earn each month?
Start with the rent, then take out every cost of being a landlord, not only the mortgage.
| Each month | |
|---|---|
| Rent | $2,300 |
| Mortgage you already have | −$1,021 |
| Property taxes | −$292 |
| Landlord insurance | −$133 |
| Empty months, repairs and big repairs (15% of rent) | −$345 |
| Property management (10% of rent) | −$230 |
| Cash flow each month | +$279 |
$279 a month is positive but thin. One empty month or one new water heater can wipe out several months of it. Your low rate is doing a lot of the work.
What would selling it put in your pocket?
| One time | |
|---|---|
| Sale price | $350,000 |
| Selling costs (7%) | −$24,500 |
| Mortgage payoff | −$180,000 |
| Cash in hand before taxes | +$145,500 |
If you qualify for the home sale exclusion below, the profit on a sale like this may not be taxed at all.
What is the three-year tax clock?
If you owned the house and lived in it as your main home for at least two of the five years before you sell, you can usually leave up to $250,000 of your profit out of your federal taxable income, or $500,000 for most married couples filing jointly. The IRS explains the rule in Publication 523.
Those five years are counted back from the day you sell. So if you lived in the house for at least two years before moving out, you can rent it out for up to three years and still qualify when you sell. Rent it out for longer than that, and the profit from the sale can become taxable.
Two more things to know:
- Depreciation comes back when you sell. While the house is a rental, the tax rules let you deduct depreciation each year, an allowance for the building wearing out. When you sell, the part of your profit equal to the depreciation you took, or could have taken, can’t be left out, even if the rest can.
- There are exceptions. A move for work, health or certain other reasons can qualify for a partial exclusion. A tax professional can tell you where you stand.
So, rent it out or sell it?
Put the two side by side, then answer two questions:
- Does renting still work if a month sits empty or something big breaks? At $279 a month, one bad month takes a long time to earn back.
- Will you decide within three years of moving out? If you might sell later anyway, the tax clock can end up costing more than the rent brings in.
For the costs a first-time landlord tends to leave out, see 12 numbers to confirm before you make an offer on a rental. They apply to a house you already own, too. And if you’re tempted to list it on Airbnb instead, run the house both ways before you buy the furniture.