Once a homeowner retires or takes a new job in another state, it usually doesn't take long for the "For Sale" sign to pop up on the front lawn.
Years of housing market turmoil have done little to change the conventional wisdom that it's best to sell when you go.
But that doesn't work for everybody. With home prices still 14 percent below their peak, according to Federal Housing Finance Agency data, some homeowners would have to take a loss to sell their homes. Others who have held their homes for many years would probably profit if they sold, but they aren't ready to make that permanent commitment.
For homeowners in both categories, it might make more sense to rent out the home for a few years rather than to sell it. But it's not a simple endeavor.
"It makes sense to rent in an area where property values are depressed," said Jerry Gross, with the accounting firm of Osterman, Pollack & Moses, LLC, in Bethesda, Maryland. In most cases, it makes financial sense to rent if the rent can cover at least 80 percent of fixed costs such as mortgage payments, taxes and insurance, said Gross, a certified public accountant and personal financial specialist.
The other 20 percent can often be taken as a tax loss and deducted against other income.
In its latest forecasts, the National Association of Realtors predicted prices of currently owned homes would increase 9 percent this year and 5.3 percent next year. Done right, it may pay to rent and wait to sell.
A FORM OF DIVERSIFICATION?
When Sue and Michael Thaler retired to Florida in 2008, they were in a position to profit on their four-bedroom, two-bath home in Arlington, Virginia. But they weren't in a hurry to sell.
They thought they might want to return to the Washington area, either permanently or occasionally to catch up on local culture and see friends. They also thought that holding on to their home as an investment would help balance their stock-heavy retirement portfolios. So even after they bought a co-op in Briny Breezes, Florida, they kept renting out their home.
They advertised it on Craigslist and were hoping for an academic tenant who would vacate the home so they could return for the summer. But that isn't what they got.
"We ended up with people who wanted to rent year around on a permanent basis, (and) four roommates, which was my lowest priority on my wish list," Sue said. But four years later, two of the original tenants are still there and the Thalers say they are happy with the arrangement.
RENTAL EXPENSES, BENEFITS
There are financial benefits to being a landlord.
Rental income is taxable, but there are deductions landlords can take against that income, Gross said. Homeowners can deduct mortgage interest, property taxes, insurance, utilities not paid by the tenant and prorated portions of the money spent to buy and improve the house, known in the tax trade as depreciation.
Those deductions can sometimes produce a loss that can offset other taxable income, but the rules are complex and the tax losses may be limited by factors like the owners' income and involvement with the property.
There are some other advantages to renting. Any trips back to the city where the rental property is located, including meals and other expenses while you are there, are deductible if the trip is for such purposes as finding and interviewing tenants and upkeep of the property.
But unless you time the sale of your home carefully, you can negate all those benefits by losing the capital gains tax break that only resident homeowners get to take.
When a homeowner sells a home, he or she typically owes capital gains taxes of as much as 20 percent on the profit - the difference between the sale price and the amount of money paid for the home. Owners who have lived in their homes for two of the previous five years can exempt up to $250,000 ($500,000 for couples filing jointly)from that tax. So homeowners who move out and rent out their home have to make sure they either sell it within three years or move back in and live in it again before they sell it in order to keep that tax break.
LONG-DISTANCE PLUMBING REPAIRS
Gross, the accountant, also cautions would-be landlords that "not everything is based on economics."
Being a landlord in the same city is challenging enough, with having to deal with vetting tenants who will live in your home and managing maintenance and repairs. But doing it remotely is even more challenging.
"You may not want to be an absentee landlord," says Gross.
It can cost between 10 and 15 percent of the rent to hire a property manager. But that's an investment that could be well worth making - especially when the plumbing fails or the dishwasher breaks and the landlord is sitting on that Florida beach, or sleeping.