Selling vs. Renting Your Condo
When comparing the pros and cons of selling your condominium instead of renting it out, factors to consider include your motivation, financial portfolio and the property’s current use. If the property is already a rental, you have different factors to consider than if it is your primary residence. Even if the condominium is presently your primary residence, renting it in the future might redefine the property in the eyes of the Internal Revenue Service.
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Renting Residential Property
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If the condominium is currently your home, turning it into a rental can change its tax status, which may improve your financial portfolio or become a tax liability. It is a discussion to have with your accountant. If you need to move from the area, and you can’t find a buyer for the condominium, renting to recoup expenses is preferable to draining your resources on maintaining the property -- or facing its loss to foreclosure and watching your credit scores plummet.
Selling Residential Property
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When you have substantial equity in your condominium, selling it while it is legally considered your primary residence under IRS rules means you don’t pay income tax on up to $250,000 of the gain, or up to $500,000, if married. To qualify as a primary residence, you must have lived in the condominium for at least two years out of the last five.
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Investment Property
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Expect to pay income tax on the profits of your sale, if the condominium is not your primary residence under the IRS guidelines. You can delay the taxes or potentially avoid paying them if you participate in a 1031 exchange, where you purchase another rental property from the proceeds of the condominium. You must follow strict 1031 guidelines in order to do this.
Condominium Rules
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Review your condominium association rules involving rentals. Some condominium association rules restrict or limit renting the properties. For example, if you are located in a resort community, the association may allow you to rent the property out by the week, while other associations might expressly forbid this practice. In some associations, the rights an owner has, such as pet ownership, don’t extend to the renter. When calculating rent, factor in the amount of association dues and other expenses associated with the unit.
Responsibility
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Selling is preferred over renting if your ultimate goal is to be free of all responsibilities associated with the property. Even if you are willing to manage the property, you may need to hire a property manager if you intend to live in another state. Some states require property owners to assign a responsible party within the state to prevent out-of-state landlords from neglecting properties. If you do decide to rent, become familiar with your state’s landlord and tenant laws, so you fully understand your legal rights and limitations.
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