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The Monitor Group, Inc. |
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Our Philosophy |
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Compelled to Sell or Relenting to Rent?
By Cal Brown, CFP
The Monitor Group
If you have recently purchased a new home and found
yourself torn on what to do with your old home, there may be
consequences to consider that you've never taken into account. From a
tax perspective, there are numerous advantages to selling your old home
and investing the proceeds in your investment portfolio:
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You could
lose the $500,000 home sale exclusion if you rent it for
more than two years and then sell. Also, with the recent
change in section 1031 rules, it is harder than ever to use
a rental home in a like kind exchange and then move back
into it later to take advantage of the home sale exclusion.
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One of the
negative tax consequences of selling a rental property is
that a portion of the profit will be taxed at your highest
marginal income tax rate--that portion is the amount you
have previously depreciated. However, if you sold it when
it was your residence, much of it would escape taxation (due
to the home sale exclusion) and the rest of your capital
gain would be taxed at 15% - there is no depreciation issue
this way.
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Do the math
- What could your portfolio generate in annual withdrawals
using a sustainable withdrawal rate of 4-5% (based on your
net proceeds from the sale of the house) vs. the net cash
flow (excluding depreciation) from renting it out? Don't
forget to deduct all expenses including mortgage payment
(not just the interest that shows up on the tax return),
property taxes, insurance, maintenance, fee to management
company, etc.
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Portfolio
appreciation is more tax efficient than rental income. Your
capital gains (if held for the long-term, which we strongly
recommend) and qualified dividends are taxed at 15%, whereas
your rental income is taxed at your marginal income tax rate
– 25%, 28%, 33%, or 35%!
There's another important
factor to consider in this decision and it has nothing to do
with taxes. What is your stage of life? If you are retired or
approaching that age, perhaps you don't need the risks that
accompany the role of landlord. Of course, those who have
experience with these responsibilities may not dare to switch
their allegiances from real estate to the stock market, "Dance
with the date who brought you to the party." But the above
points are important considerations pointing to the fact that
some people would benefit by selling their old home rather than
renting it.
*****
Cal Brown is Vice-President of The Monitor Group, Inc., a fee-only financial planning firm located in the Tyson's Corner area of McLean, Virginia. As a nationally recognized wealth management firm, The Monitor Group provides investment and financial planning services to more than 190 high net worth client families in Northern Virginia, Maryland, Washington, DC and across the country. Click
here for more information about Cal and The Monitor Group, Inc.
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The Monitor
Group, Inc.
Wealth Managers,
Investment Advisors, Certified Financial Planners™
1430 Spring Hill Road, Suite 400
McLean, VA 22102
Tel:
703.288.0500 Fax: 703.288.0900
www.TheMonitorGroup.com
The Monitor Group, Inc. is
a Registered Investment Advisor with the United States Securities & Exchange
Commission and maintains a notice filing with the following states: Florida,
Louisiana, Maryland, Texas, Virginia . The presence of this web site on the
Internet shall in no direct or indirect way be construed or interpreted as a
solicitation to sell advisory services to residents of any state other than
those in which it maintains a notice filing and shall not be deemed to be a
solicitation of advisory clients living in any state other than those in which
it maintains a notice filing.
Copyright (c) 2005, The Monitor Group, Inc. All Rights Reserved.
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