The decision to turn your home into a rental is much bigger than most people realize. Becoming an investment property owner can turn into an extremely profitable business, but that doesn’t mean it’s not a lot of work. You’ll want to make sure that you’re doing everything right in order to make such a big investment really worth all that time and energy. Listed below are two simple questions to ask yourself before making such a big decision.
How Can I Utilize The Tax-Free Capital Gain?
Selling your home for more than you paid earns you “capital gain.” This means your “profit” is normally subjected to a capital gains tax which ranges from 0% to 20% depending on your income. Has the home been your primary residence for two full years out of the previous five? If so, you might be able to sell your home without paying any capital gains tax. The primary residence capital gains tax exclusion totals $250,000 for single taxpayers and $500,000 for married couples who file their tax returns jointly. Just remember, to qualify for this tax-free benefit you must sell your home within three years of moving out.
What Is My Estimated Rate of Return On This Investment?
Before turning your house into an investment you should clearly understand the estimated rate of return. Ask yourself each of these important questions:
- What Will I Charge For Rent?
- What Will My Monthly Expenses (Including Maintenance) Be?
- What Will Be My Holding Period & When Will I Sell My Investment?
- What Will The Sale Price Be, Including Costs Of The Sale & Net Proceeds?
- What Will My Annual Rate Of Return Be & How Does It Compare With Other Investments?
Turning your home into an investment property can be a fantastic way to start making extra income. However, it’s also recommended that you speak with a local certified public accountant (CPA) in order to get a better understanding as to whether or not this would be right for your individual