Owning multiple properties may initially seem like an easy way to make money without much work, but it can quickly become a financial strain.
Even if you are not living in your other property, you must pay taxes and upkeep fees for the home.
If you own multiple properties, you must decide which house you want as your primary home. Once you know where you want to live, you need to decide what happens to the second home. Ultimately, you have two options for your second home. You can sell the house or rent it out. If you decide to rent your second home, you must decide if you want to rent it out throughout the year or for set periods of time. Deciding whether to rent or sell your home is a big financial decision, so you do not want to rush into your choice. To help decide, consider the pros and cons for selling or renting a second home below.
There are a few different reasons why renting your property is immediately better than selling it. Selling your house is a permanent decision. If you are second guessing whether you may want to move back into your second property, renting your home, at least for a while, may be more attractive than getting rid of it forever. Other reasons to rent your property instead of selling it include:
One of the most common reasons property owners sell second homes is if the property is located far away from their primary address. If you know you want to live in a home far away from your existing property, renting is difficult. In these cases, you must rely on a third party to maintain the property or you have to commit to traveling to your secondary address whenever maintenance is needed. Depending on when you plan to move, you must decide if you want to interview prospective tenants in person. If you are comfortable letting a third party handle the process, you can conduct the interview from afar.
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If you have not purchased your second home yet, it may be worth selling your other property for the immediate cashflow, so you can buy the home you want. If your second home is located in a hot seller’s market, it makes sense to sell it. Seller’s markets can only last for so long, so if you do not sell relatively quickly, you risk missing your moment and end up selling your house for less than you would have gotten for it earlier.
What taxes you must pay each year depends on whether you sell or rent your property. No matter what, as a property owner you must pay property taxes each year. Your property taxes do not change based on whether you are selling or renting your home. One of the benefits of renting your home is you can use the money you raise to help pay your property taxes. You must report any money you raise from renting your home as income, which counts as taxable income.
There are a few second-home tax deductions you can use if you rent your home. There are some deductions available for repair costs, and you can factor in depreciation values. If you rent your second property, you are strongly encouraged to speak with a tax attorney or real estate expert to maximize how much you save through deductions.
Finally, there are capital gains taxes to consider. If you only lived in the second home for two to five years, you can avoid paying any capital gains taxes up to $250,000 if you file taxes as an individual, or $500,000 if you file as part of a married couple. Once your five-year window passes, you are unable to avoid paying capital gains on your taxes. How much you owe on your capital gains taxes is based on how much you sell your house for.
One of the differences between selling and renting a home is the additional expenses associated with renting. When you rent your home, you must consider the following costs:
The biggest difference between renting and selling your home is that when you rent, you become a landlord. If you do not want to directly manage your second property, you can hire a property manager. Hiring a property manager adds to your overall rental expenses. If you decide to be your own property manager, you must be on hand to take care of your property whenever anything goes wrong.
There are additional risks with renting your property. You need to ensure you are selecting quality tenants who pay on time and are unlikely to damage your property. The risks associated with renting your property may be balanced out by the potential long-term gains. Once you get into the flow of renting your property, you can easily raise more money over time by renting than you would selling your second property.
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