Should I Sell or Rent my House

I get this question a lot, and the answer isn’t what you think. While tax implications are a part of the answer, the real answer has very little to do with taxes. I will explain some of the tax implications below, but first, these are the questions you should be asking yourself, in rough order of importance as to how they apply to the decision (these assume you have owned and lived in the home for at least 2 years and it has never been a rental while you owned it):

1. Can I sell my house for what I owe and not have to short sell or take on debt?
2. Is the market my home is in more favorable for renting versus selling?
3. Would delaying selling for less than 3 years make a lot of difference?
4. Do I WANT to be a landlord?
5. Can I financially sustain a serious issue with my tenants that could cost many months in lost rent and/or major repairs?
6. Is building up a portfolio of passive income with rental property something I am interested in?
7. Can I handle the extra work and recordkeeping involved in being a landlord?
8. Does maintaining ownership of the property impact my ability to finance a subsequent property?
9. Does it make sense from a tax standpoint?

Notice how far down the list taxes are. I’m going to talk a lot about taxes and rentals in general and it is CRITICAL that you realize these are broad strokes and in no way detailed enough to make the decision. They just point you in the right direction for future research and your situation may make some of the rules not apply:

1. You can likely sell your current residence and pay no, or very little taxes compared to if you sold it as a rental.
2. You will likely be able to avoid paying taxes on rental income for quite some time until rent increase and mortgage paydown creates excess profitability.
3. You might even be able to deduct some or all of the rental loss off of your other income if you make less than $150,000.
4. The reason for the above two points is that you get to depreciate the property. This gives you a large deduction that isn’t “real” in the sense that you don’t cut a check for it.
5. The downside is that when you sell, your profit is increased by the total depreciation you took while it was a rental. Unless you sell for a substantial loss, you will likely pay taxes on this amount even if the gain from the sale is otherwise excludable. This makes it a DEFERRAL of taxes, not a reduction.
6. If you sell the property within 3 years of converting it to a rental, you MIGHT be able to avoid taxes on price appreciation since it still qualifies as a personal residence (maybe). You still pay taxes on depreciation.
7. For active duty military, you can possibly extend that 3 years above to 13 years, or 3 years after discharge, whichever comes first.
8. As the dates discussed in the above two approach, you should analyze the market to see if there is a compelling reason to sell due to big increases in property values.
9. You can generally only use the exclusions discussed above once every 2 years, by date (use 3/15/26 – can’t use again until 3/16/28).
10. There are exceptions to many of the above time limits for exclusions.

If you read carefully, you will see that taxes on rentals represent a series of trade-offs and deferrals, so there is no definitive “best” way to avoid taxes.

Bottom line, make the decision based on YOUR life and wants, with taxes as a tie-breaker.

This is often the right answer in most decisions.