Q. Give me a convincing argument for either selling or renting my house and you can have my business. I’ve got to do one or the other because I’ve been transferred to another state and my wife and I don’t agree about what to do.
I’m told the house is now worth only $175,000, even after updating recently with new cabinets, paint and carpet, compared to $200,000 several years ago. A management company has said they can rent it for only about $1,100 to $1,200 monthly, maybe a little more.
I don’t want to take $175,000 for a house recently worth $200,000, so I’m leaning toward renting it until the market comes back, and then selling it. The house is paid off and my wife says that since we only paid $75,000 for the house many years ago, we should sell now and take the $100,000 profit and move on.
I want to sell it, too, but if we can rent it for several years, we can make another $25,000, even though I don’t particularly want to own rental property in one state while I live in another one.
Don’t bother answering this question with “On one hand this or on the other hand this other”, please. I can sit on the fence by myself, but if you’ve got a strong recommendation either way, I’d like to hear from you. This decision is keeping me up nights and turning into an argument between me and my wife.
A. Well, on one hand……(just kidding.)
Rental property is a great investment, if bought and managed correctly, and I recommend it for many clients when appropriate for their investment, estate or retirement plan. But there are two very important people who think you should sell it – even at $175,000. I agree with both of them.
The first important person, of course, is your wife. If she ain’t happy, you surely won’t be happy, either. The second important person here is your Uncle Sam. Arguing with Uncle Sam in this situation can cost you big money. (Don’t rely on this for fine-tuned income tax information, there’s not enough room here for that.).
Here’s why: If a house has been your home place for two of the previous five years, you’re entitled to a $500,000 capital gains exclusion on the profit ($250,000, if single).
If you paid $75,000 for the house 15 years ago and sell it for $175,000 today, you’ll have a $100,000 profit/capital gain (ignoring expenses of sale) As the homeowner, you’ll pay no tax, as it’s below $500,000 and it’s been your home for two of the previous five years.
But rent it for a day over three years and THEN sell it and (based on current federal/state tax law) Uncle Sam will want 15% and the state (Georgia) will want another 6% on your $100,000 profit. That’s a fat $21,000 bite. It’s also almost equal to the difference between the $175,000 value today and the $200,000 you say the house was worth awhile back.
If you want to gamble, then rent the house for a couple of years – but you better be able to sell it before the three years are up. Plus, right now, with you and your wife living in it, the house probably looks better than it will after being rental property for a couple of years. In a couple of years, you may have to redo the carpet and paint, if tenants don’t take care of them.
On top of that, the market may not have moved your price back up to $200,000. You could end up netting only $175,000, after having to spend money on the house. Plus you’d be forced to sell it to meet Uncle Sam’s non-negotiable deadline.
We manage many houses for both investors and “accidental” landlords who couldn’t sell for enough to make it worthwhile. I’d like to have your house to manage, also, but the bottom line: Maybe for slightly different reasons, your wife’s right. Sell the house for $175,000.
Mike Hill has been in real estate sales, both residential, commercial and investment, since 1976. He has been managing property since 1980.