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Should I Sell Or Rent My House In Today’s Market? | Bankrate

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FluxFactory/GettyImages; Illustration by Hunter Newton/Bankrate

Key takeaways

Deciding whether to sell your house or rent it out depends on personal circumstances, such as immediate cash needs and future housing plans.

Selling might be the better option if you need the proceeds to pay for your next home or stand to make a large profit.

Renting it out could be a good choice if you’re looking for additional income or if you’re moving temporarily and plan to come back.

There are many reasons why a homeowner might want to move. But whatever your reason, one question still applies: What should you do with your current home? Depending on your financial situation and your local housing market, you might consider renting it out rather than selling. If you’re caught in the sell versus rent debate, here are some factors to consider, including the costs.

Should I sell or rent my house?

A home is the biggest financial asset most people own, and deciding what to do with it shouldn’t be taken lightly. There are pros and cons to both options: For example, selling gets you a large windfall of cash all at once, while renting earns you smaller increments of steady monthly income from your tenants. If you have somewhere else to live and can afford to hang on to the house, renting it will also allow you to continue building equity as home values go up. Take a look at the following scenarios to determine which path is best for you.

When selling your home is a good choice
If you need the cash to pay for your next house

If your ability to buy a new home relies on accessing the money tied up in the current one, then selling is the best option. That way, you can take all your proceeds from the sale and put it toward your new down payment. Buying a new home while selling your current one can be a tricky balancing act, so be sure to work with an experienced real estate agent who can guide you through the process.

If you have no interest in being a landlord

Managing a rental property is time-consuming and often challenging. Are you handy and able to make some repairs yourself? If not, do you have a network of affordable contractors you can reach out to in a pinch? Consider whether you want to take on the added responsibility of being a landlord or paying for a third party to take care of things instead.

If you stand to make a significant profit

Property values have risen all over the country over the past few years, and home prices remain high. Depending on how long you’ve owned your home, how much you paid for it and how hot your local market is, selling could net you a significant windfall. Take a look at nearby real estate comps to see how much homes similar to yours have been selling for.

If you are eligible for capital gains tax exemptions

If you do sell your home for a profit, you may be able to exclude up to $250,000 of capital gains from the sale (or up to $500,000 for married couples filing jointly) from your taxes. For this to apply, the home must have been your primary residence for at least two out of the last five years, among other criteria.

When renting your home is a good choice
If your move is temporary

If your move is short-term and you plan on returning to your current city in the future, you may want to keep your home and rent it out in the meantime. Knowing there will be a place for you to live when you return provides peace of mind — and when you factor in closing costs, it may even cost less than selling and purchasing another home at a later date.

If you want the rental income

Extra income can be hard to turn down! But if you decide to rent your current home and want to buy another one with a mortgage, keep in mind that lenders will consider rental income when determining your financing. In some cases, a lender will only allow a portion of your rental income to be counted as an income source. In addition, you will be carrying two mortgages at once, so make sure this is something you are financially able to take on.

If rental demand in your area is high

Is your home in a hot neighborhood with lots of buzz? Is it in an extremely desirable school district, near a vacation destination like a beach, or close to the best amenities in town? Evaluate the rental demand in your area — renting is much less stressful when finding a tenant is fast and easy. Research the local housing market to determine what other similar properties are charging in rent. You can also speak to a local agent or property management company to learn more about the rental demand in your neighborhood.

If you expect home values to rise in your area

It’s impossible to foresee with 100 percent accuracy where the housing market is headed. That being said, you may be able to make an informed prediction. If you expect that your current home’s value will increase within a few years or less, you might want to consider renting it out now and selling later, to take advantage of the price appreciation.

Selling vs. renting your home: Costs to consider

Both renting and selling a home will incur costs. One of the most important things to think about is whether the rental income you’d receive will be enough to cover the property’s mortgage and upkeep.

To determine how much rental income you can reasonably expect to earn, take a look at what other similar properties are charging and weigh that against the costs of owning and maintaining the property. From there, you can gauge whether you’ll be able to recoup your expenses, and maybe even turn a profit.

Costs of renting out a home

Mortgage: Even though you’ll be earning rental income, you’re still responsible for paying the mortgage, which may or may not be fully covered by the rent you bring in. The same goes for property taxes.

Insurance: Landlord insurance can cover certain costs, such as damage to the home or someone getting injured on the property. You can expect this to cost roughly 25 percent more than the typical homeowners insurance policy — which you’ll also still have to pay for.

Maintenance and repairs: You’ll need to keep up with routine maintenance to ensure the home is fit for tenants. As a rule of thumb, budget at least 1 percent of the home’s value every year (more if it’s an older property) to pay for maintenance.

Finding a tenant: To find a tenant, you’ll have to get the word out. Consider any marketing costs you may incur, such as taking out an advertisement. You may also need to pay for background and credit checks of potential renters — though you might be able to pass this nominal expense on to the tenant.

Vacancies: Consider, too, the cost of vacancies between tenants. If a tenant moves out and you don’t have a replacement, that’s income you’re losing out on.

Property management fees: Hiring a property manager makes being a landlord less onerous, but it will eat into your profits as well. These companies tend to charge a percentage of the rent price, typically around 10 percent.

HOA fees: If your home belongs to a homeowners association, you’ll also be responsible for HOA fees, which vary considerably depending on what type of amenities are offered.

Costs of selling a home

Agent commissions: For ages, the typical real estate commission has been between 5 and 6 percent of a home’s sale price, split evenly between the seller’s agent and the buyer’s agent and paid entirely by the seller. That is about to change, however, as a result of a legal battle recently settled by the National Association of Realtors. Beginning this summer, depending on the deal, buyers may be responsible for paying their agent’s commission directly. That said, a single agent’s fee is still a significant expense: On a $400,000 sale, for example, 2.5 percent comes to $10,000.

Home improvements: To get your home in shape to sell, you’ll likely have a few services to pay for. These might include sprucing up the landscaping, a thorough deep cleaning and making any necessary repairs. And paying a pro to stage your home can increase its desirability, potentially bringing in a higher price.

Closing costs: Sellers typically incur some closing costs beyond Realtor commissions, too, such as attorney fees, transfer taxes and title insurance.

Mortgage payoff: If you still have a mortgage on the home, once you’ve sold it, some of the proceeds will go toward paying off the remainder of your loan.

What if there’s a recession?

Some economists still predict a recession in the country’s near future. According to Bankrate’s most recent Economic Indicator Poll, the odds of a recession over the next 12 months are 33 percent. Before you make a final decision on whether to sell your house or rent it out, ask yourself how a serious economic downturn might affect your finances. Is your job stable? Is your savings strong? Would you still be able to manage two mortgages during a recession, or the possibility of less rental income than expected? If the answer to any of these questions is no, selling may be the safer option.

Bottom line

The question “should I sell or rent my house?” requires careful consideration of your financial situation, lifestyle and local housing market. To help guide your decision, consider the costs of both options, whether you’ll return to your current location anytime soon and if you’re interested in being a landlord.



This article was originally published by a www.bankrate.com . Read the Original article here. .

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Capital Gains Tax On Real Estate And Selling Your Home | Bankrate

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Key takeaways

Capital gains tax is a levy imposed by the IRS on the profits made from selling an investment or asset, including real estate.

Primary residences have different capital gains guidelines than rental and investment properties do.

It’s possible to lower the capital gains tax you owe by taking advantage of available deductions, exemptions and exclusions.

Naturally, you want to make a nice profit on your home when you sell it. But beware a bite in your earnings when tax day rolls around: the capital gains tax. If your home has substantially increased in value, you could be liable for a substantial sum when you pay your annual income tax.

Fortunately, there are ways to avoid or reduce the capital gains tax on a home sale to keep as much profit in your pocket as possible. Here’s everything you need to know.

What is the capital gains tax on real estate?

Key terms

Capital gains tax
A levy imposed by the IRS on profits made from the sale of an asset, such as stocks or real estate — that profit is considered taxable income.

Long-term capital gains
A tax on assets held for more than one year.

Property value
The amount a buyer is likely to pay for a real estate asset (i.e., property).

Broadly speaking, capital gains tax is the tax owed on the profit (aka, the capital gain) you make when you sell an investment or asset. It is calculated by subtracting the asset’s original cost or purchase price (the “tax basis”), plus any expenses incurred, from the final sale price.

Special rates apply for long-term capital gains on assets owned for over a year. The long-term capital gains tax rates are 15 percent, 20 percent and 28 percent (for certain special asset types, like small business stock collectibles), depending on your income.

Real estate, including residential real estate, counts as a taxable asset. Therefore, any financial gains from a home sale must be reported to the IRS: You calculate and pay any money due when filing your tax return for the year you sold the property.

While its rates are typically lower than ordinary income tax rates, the capital gains tax can still add up, especially on profits for big-ticket items like a home — the largest single asset many people will ever own. The capital gains tax on real estate directly ties into your property’s value and any increases in its value. If your home substantially appreciated after you bought it, and you realized that appreciation when you sold it, you could have a sizable, taxable gain.

How much is capital gains tax on a primary residence?

Calculating capital gains tax in real estate can be complex. The tax rate depends on several factors:

Your income tax bracket
Your marital status
How long you’ve owned the house
Whether the house was your primary residence, a secondary residence or an investment property

Star Alt

Keep in mind: The tax is only assessed on the profit itself. If you purchased a house five years ago for $250,000 and sold it today for $500,000, your profit would be $250,000. (Though there are deductions you could take that would effectively reduce your net profit.) You would need to report the home sale and potentially pay a capital gains tax on the $250,000 profit.

For the 2023 tax year, you are not subject to capital gains taxes if your taxable income is $44,625 or less ($89,250 if married and filing jointly). If it’s between $44,626 and $492,300 as a single filer, or between $89,251 and $553,850 if married and filing jointly, you would pay 15 percent on the $250,000 profit. Above those top amounts, the capital gains rate would be 20 percent.

However, the IRS gives home sellers multiple ways to avoid or reduce their capital gains taxes, principally if their property is a primary residence. You can exempt a certain amount of the profit — up to $250,000 or $500,000, depending on your filing status — from the tax if you meet certain conditions.

An ill-timed sale could result in a significant tax bill that could have otherwise been avoided.
— Greg McBride, Bankrate Chief Financial Analyst

“Before selling your home, familiarize yourself with the capital gains tax exclusion rules and consult a tax advisor,” says Greg McBride, Bankrate’s chief financial analyst. “An ill-timed sale could result in a significant tax bill that could have otherwise been avoided. If the property has been your primary residence for less than 24 months, for example, you may decide to hold off until you’ve reached that threshold to avoid capital gains tax.”

If you sell a house or property in one year or less after owning it, the short-term capital gains is taxed as ordinary income, which could be as high as 37 percent. Long-term capital gains for properties you owned for over a year are taxed at 0 percent, 15 percent or 20 percent depending on your income tax bracket.

How much is capital gains tax on a rental property?

A rental property doesn’t have the same exclusions as a primary residence when it comes to capital gains taxes. You would have to pay a 25 percent depreciation recapture tax on the portion of your profit from previously claimed depreciation and 0, 15 or 20 percent in long-term capital gains taxes, depending on your income and filing status on the balance.

Suppose the property you bought for $250,000 and sold for $500,000 was a rental. If your profit included depreciation you claimed as a business expense, the IRS would levy a 25 percent depreciation recapture tax on that amount. Your profit balance would be taxed at a 0, 15 or 20 percent capital gains rate, depending on your income.

If you plan to sell a rental property you’ve owned for less than a year, try to stretch ownership out to at least 12 months, or your profit will be taxed as ordinary income. The IRS doesn’t have a ceiling for short-term capital gains taxes, and you may be hit with up to 37 percent tax.

How to avoid capital gains tax on a home sale

Capital gains taxes can greatly affect your bottom line. Fortunately, there are ways to reduce or avoid capital gains taxes on a home sale altogether. It depends on the property type and your filing status. The IRS offers a few scenarios to avoid capital gains taxes when selling your house.

Bankrate insight

When does capital gains tax not apply? If you have lived in a home as your primary residence for two out of the five years preceding the home’s sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes. The two years do not necessarily need to be consecutive. If you become disabled, receive a job offer in a new area or are forced to sell your home before you have lived there two years, you may qualify for an exception to the two-out-of-five rule.

Avoiding capital gains tax on your primary residence

You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years. But it can, in effect, render the capital gains tax moot.

Let’s say a single filer bought a home for $250,000, lived in it for three years, and then sold it for $400,000. Their profit is $150,000. But that’s exempt from any capital gains tax because it’s under the $250,000 threshold allowed for gains.

Of course, there are conditions. To qualify as your primary residence, the IRS requires that you prove the property was your main home where you lived most of the time. You’ll need to show that you owned the home for at least two years and lived in the property as your primary residence for at least two of the five years immediately preceding the sale.

However, there is wiggle room in how the rules are interpreted. You don’t have to show you lived in the home the entire time you owned it or even consecutively for two years. You could, for example, purchase the house, live in it for 12 months, rent it out for a few years and then move in to establish primary residency for another 12 months. As long as you lived in the property as your primary residence for 24 months within the five years before the home’s sale, you can qualify for the capital gains tax exemption. And if you’re married and filing jointly, only one spouse needs to meet this requirement.

Avoiding capital gains tax on a rental or additional property

If you own an additional property that you plan to sell, you will need to plan to lower your tax liability. There are several ways to mitigate any capital gains tax:

Establish the rental as primary residence

You might find that an investment property you rent out and plan to sell has spiked in value. Moving into the rental for at least two years to convert it into a primary residence to avoid capital gains may be a good idea. However, you won’t be able to exclude the portion you depreciated while renting the property. You’ll lose primary residency status on your main home, too, but that can be regained later by moving back in after the sale of the rental property. If you don’t plan to sell the main home for at least two years, you can re-establish primary residency and qualify for the capital gains exclusion later.

1031 exchange

You can also take advantage of a 1031 exchange. Known as a like-kind exchange, it only works if you sell the investment property and use the proceeds to buy another similar property. If you keep putting the sale proceeds into another investment property, you can put off capital gains tax indefinitely.

Opportunity zones

The 2017 Tax Cuts and Jobs Act created opportunity zones — areas around the country identified as economically disadvantaged. If you choose to invest in a designated low-income community, you’ll get a step up in tax basis (your original cost) after the first five years. And any gains after 10 years will be tax-free.

Deduct expenses

If you still have capital gains after taking advantage of exemptions and exclusions, focus on lowering the amount of the taxable profit or gains. Some qualifying deductions include:

The cost of repairs to a home or investment property
Improvements and upgrades, such as adding a bedroom or renovating a kitchen

Losses in investment property income due to tenants unable to pay rent
Cost of legal, professional and advertising fees to evict a tenant or find a new one

Closing costs from the property sale

Remember to keep organized records and documents, including receipts, bills, invoices and credit card statements, to support your expense claims in case you’re audited.

FAQs

How much is capital gains tax on real estate?


The capital gains tax rate on the sale of a primary residence can be as high as 20 percent of the profit on a home owned for more than a year, and as high as 37 percent on one owned for a year or less. If you own and live in the home for two out of the five years before the sale, you will likely be exempt from any capital gains taxes up to $250,000 in profit, or $500,000 if married and filing jointly.

Is there a way to avoid capital gains tax on the selling of a house?


You will avoid capital gains tax if your profit on the sale is less than $250,000 (for single filers) or $500,000 (if you’re married and filing jointly), provided it has been your primary residence for at least two of the past five years. For investment properties, capital gains taxes can be deferred with a Section 1031 like-kind exchange, in which you use the profit from the sale of one investment property to buy another of equal or greater value.



This article was originally published by a www.bankrate.com . Read the Original article here. .

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