Real Estate: Sell or Rent?
To Sell or to Rent Out? That is the Question.
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Roy Wakumoto’s tale of homeownership is familiar: from homeowner to landlord and back. Wakumoto bought his Salt Lake condominium as a bachelor pad. Then he moved in with his girlfriend and rented it out. He held onto his condo as a landlord until this year, when he decided to sell, as home prices started to climb. “I sold the unit because I could finally get back the equity; I wanted to sell it before I lost the equity again,” he said.
Maybe there was a time when Americans bought one home to last a lifetime, but that is not the case as much anymore. People move around. Things change. Life plans get drawn up and redrawn. For whatever reason—a kick-ass job offer in another state, an empty nest, divorce, wanderlust—it’s time to get out of that house you’ve been living in. Time, especially, to turn that house into some serious cash.
You’ve got two choices: Sell it for big money up front, or rent it out for steady money in the long run. Wakumoto said selling is a no-brainer if you have just enough income to pay your monthly bills, and need the proceeds from the sale of your current home to buy your dream home. But what if, as is the case for many people in the state, your home has appreciated significantly, or your income has increased to the point where you think you could go either way? Which way should you go? What can you expect out of either choice?
You Should Sell Your House…
… If you expect home prices to decrease. James Lewis, a Realtor with Coldwell Banker Pacific Properties, says, “Many times, in this particular market, there’s been rapid appreciation … so it makes sense to sell, especially if you’re an owner-occupant.” Selling qualifies you for a tax exemption on a maximum of $500,000 in capital gains on your home for a married couple filing jointly, or $250,000 for a single person. Generally, gain is the difference between the price you paid for your home (plus capital improvements) and the price the buyer paid for it. “If you have more than the $500,000 maximum exemption, then there will be taxes to pay,” says Hedburg. Generally, if you’ve never rented out your place, there’s 15 percent in federal and 7.25 percent in Hawaii state taxes. In contrast, rental income is taxed as ordinary income, plus the 4.5 percent general excise tax, and a transit accommodation tax, if your home is rented for less than 180 days.
…If you’ve lived in your primary residence for at least two out of the last five years. CPA Jeannie Hedburg says the two-year requirement is based on a federal law meant to benefit seniors who may need to live in a care home temporarily. “That way, they aren’t forced to sell their homes if they aren’t emotionally ready,” she says. With the law in place, she says, those who want to live on the Mainland for a few years can rent out their properties without losing out on the exemption.
“I look back 60 months from the date to close—if it’s been your primary residence for 24 months out of the 60 months, even if you’ve been in and out, you still get the tax exemption,” she says.
… If you’re leaving the state and are definitely not coming back. But be sure about it. The allure of new, lower-priced, large homes on the Mainland has enticed many homeowners in Hawaii to sell, pack up and move, only to regret it. “Once you’ve sold and moved, it can be very difficult to reverse the process. You may find you’ve been priced out of home ownership in Hawaii,” says Lewis.
You Should Rent Out Your House…
… If you expect home values to remain stable or increase in three years. Lewis says, “Historically, real estate continues to increase in value over time. So keeping a property and renting it out will add to your net worth as the value increases.”
… If your income from rent covers mortgage and other expenses. Hedburg says that, while rental income is taxed as regular income, meaning you pay 4.5 percent general excise tax annually, you can deduct your expenses, and actually only pay taxes on whatever is left over. “In most cases, there’s nothing left,” she says, “You can collect $1,000 a month in rent and pay out that same amount after paying the mortgage, maintenance fees, repairs, sewer fees, etc. In that case, you’re holding onto the property for future appreciation.”