What are the tax implications if I were to rent my current home long term vs. selling it?
You are wise to consider the benefits of renting or selling your current residence. The easiest solution is to sell it and take advantage of the Internal Revenue Code Section 121 home sale gain exclusion of up to $250,000 (married filing separately) or $500,000 (married filing jointly) of gain on the sale of property owned and used as a principal residence for at least two of the five years before the sale.
Long-term renting of your current residence converts the property to rental property, subjecting it to passive activity rules. This option may make sense if you are not satisfied with your current fair market value, with renting being an option to hold the property until the value rises to a satisfactory level. The caveat to long-term renting is that you will exceed the time period for Section 121 eligibility, thus incurring the consequences of income taxation upon the sale or other disposition of the property. Being a landlord comes with its own set of challenges, including tenant issues, maintenance and repair, etc. Tenants’ rights also may require certain expenditures to comply with local laws and ordinances.
Ultimately, your investment strategies will direct your decision. Converting your property diversifies your portfolio, subject to some additional risk. Additionally, you may benefit by net rental income to provide extra cash flow. However, eventual disposition will be a taxable event.
Many more options exist with this decision. You should consult with a competent and trusted tax adviser.
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Answered by: Gregory Paulding, CPA, is president of Paulding & Associates PC in Erie, Pa.