For many reasons, rentals are in high demand in and around Staten Island these days. And that means potential home sellers may have another option - renting out. If you think you’d like to rent out your home once you’ve moved into a new one, there are many factors to consider. This may well be the best option for your, but you need to make sure you know all the facts before you jump into this type of financial and legal arrangements.
Understanding the Tax Implications
When you rent out your home, you’ll enter a whole new arena of tax deductions and exemptions. You can, of course, still deduct the mortgage interest you pay each year (assuming you still have a mortgage) and the property tax payments you make. And you can also deduct just about any costs incurred in the process of managing or maintaining your property - things like broker fees, fire and liability insurance, management company fees, and maintenance and repair costs.
You’ll also be able to deduct - and this is the big one - the depreciation of your property over time. This is somewhat of a complicated concept, but the bottom line is that you can often deduct enough through this provision every year to eliminate the need to pay any income tax at all on your rental income. The downside, though, is that when you do sell, you’ll be taxed on the total depreciation you claimed, and that can turn into a pretty hefty bill.
The other tax issue to consider, especially if you expect to sell your home for a lot more than you paid for it originally, is capital gains. Unless you live in your home for at least 2 of the 5 years preceding the sale, you’ll have to pay capital gains tax on any profits you receive. Of course, there are several ways to circumvent this - by moving back in for a couple of years before selling, for instance. And this also won’t be an issue if you’re not going to make much of a profit when you do sell.
Fitting a Rental into Your Portfolio
Even if it’s been your home for many years, once you turn that house into a rental property, you have to think of it as an investment. You have money tied up in your rental that you could have invested in other interests, so unless you’ve maxed out those other options and you already feel you have a diversified portfolio, you may want to think twice about renting as opposed to selling. After all, you can always take the extra cash and buy another home to rent out if you decide later that it’s the best option for you.
The Hassles of Renting
There are also a lot of challenges that come with being a landlord. You’ll have to advertise to find people interested in renting from you, make sure the property stays in good repair and conforms to all legal requirements, and be prepared to deal with periodic vacancies (which means no rental income) or the need for evictions. While evicting a tenant may sound like a quick and easy fix, it can turn into quite a long and arduous process even if you have firm legal standing to have them removed. And that can cost you a lot in the long run.
None of this means that you won’t have a great experience renting out your home or that it’s not a sound financial decision for you, but you do need to make sure you’re aware of all the pros and cons before you make your move.