Rent or own in retirement?

By Andrew Zashin*

The majority of Americans age 65 and older are homeowners and almost all of them own their homes free and clear, according to a Merrill Lynch-Age Wave survey. But in this current sellers market, does it make sense to continue to own? In other words, if you are a retiree, is there a benefit to selling your home and to rent instead?

Under current federal law, homeowners can qualify to exclude all or part of the gains received from the sale of their main residence from their income. Specifically, tax guidelines allow an excludable gain up to $250,000 per taxpayer or $500,000 on a joint return filed by a married couple. The law also permits more than one exclusion per taxpayer per lifetime.

A taxpayer can only exclude the gain from one home sale during the two-year period ending on the sale date. However, to qualify for the exclusion a taxpayer must have owned the home for at least two years and lived in the home as their main residence for at least two years. Both tests must be satisfied during the five-year period up to the date of the sale. The homeowner must report the sale of the home to the IRS even if the gain from the sale is excludable.

As a result of the exclusion, the sale of one’s home can generate a significant amount of money that can be invested and generate income. This income can then be used to help pay rent on an apartment, house or a condo. From a pure financial perspective, renting can be a more affordable option for retirees who are looking to downsize and walk away from the price tags that come with home maintenance and repair.

However, retirees often have a strong desire to age in place and own their home. But if that desire does not apply to you, renting rather than buying, regardless of housing type, allows you to invest the money from your home sale to create an additional income stream, assuming you have the discipline to use the proceeds wisely. According to Homeadvisor, in 2020, maintenance spending among homeowners who completed home maintenance projects was $3,192, a $2,087 increase from 2019.

The biggest advantage to renting a single-family home is that one can retain the greater privacy and peace and quiet that come with this type of residence compared with a multifamily property. The biggest drawbacks include social isolation and accessibility issues related to the physical disabilities that often accompany aging. Similarly, renting a condo allows one to experience its upsides without the financial obligations associated with owning one.

Renting in retirement could also be a good choice if one is moving to be near a relative who might end up moving themselves. Apartments can be the least expensive rental option of all, in part because they are often smaller than condos and houses. But one often gives up peace and quiet and privacy when renting an apartment.

As with so many things in life, there is no one size to fits all. There are many factors to consider when it comes to renting or owning. However, efforts are underway to significantly change the tax laws that may result in losing the exclusion and raising tax rates which, on a $500,000 otherwise excludable gain could result in you paying as much as $200,000 of taxes on a $500,000 sale of your home. As a result, it is always best to speak with your tax adviser prior to making any significant residential changes.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:07-05:00July 16th, 2021|home ownership, rentals, Retirement Planning|

Is Airbnb or Vrbo for you?

By Andrew Zashin*

Are you thinking about listing your property for short-term rental through a company like Airbnb or Vrbo? The popularity of short-term rentals through these type of commercial services has become extremely popular.

But, like many things in life, short-term rentals carry with them numerous legal and tax issues a property owner needs to think about. First and foremost, it is important for the owner to understand how the laws work in the municipality where the property is located. Some cities have laws that restrict your ability to host paying guests for short periods.

These laws are often part of a city’s zoning or administrative codes. In many cities, you must register, get a permit, or obtain a license before you list your property or accept guests. Certain types of short-term bookings may be prohibited altogether. Local governments vary greatly in how they enforce these laws. Penalties may include fines or other enforcement. It is important you have a clear understanding of these laws before you act.

In some tax jurisdictions, companies like Airbnb will take care of calculating, collecting and remitting local occupancy tax on behalf of the renter. The rental service you use can provide you with details on how, or if, they handle those taxes.

Liability protection is also important in case a guest is injured or dies while using the property. Both Airbnb and Vrbo provide liability insurance and that is all explained in the owner contract with the company you use. However, it is critical that an owner advise their personal insurance agent that wrote the policy for the property. Some insurance policies do not provide coverage if the property is being used for commercial purposes. Renting is a commercial use. An owner should know the full extent of their coverage and the exceptions for coverage clearly. An owner can also ask the policy provider if there is an endorsement they can provide to confirm the fact that there is coverage.

There are also tax consequences. An owner can rent out all or part of their home or apartment for up to 14 days per year. All rent received during this period is tax-free, no matter how much the owner earns. In fact, an owner does not have to report the income to the IRS. Rental income is tax-free if, during the year the owner rents out their home for 14 days or less, and the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others at a fair rental price. An owner needs to keep careful track of rental or non-rental days.

If an owner rents their main residence (house or apartment) for more than 14 days during the year, and live in it 15 days or more, the owner does not qualify for the tax-free treatment described above. Instead, the owner is required to report and pay income tax on the rental income by filing IRS Schedule E along with their tax return. However, the owner would be allowed to deduct rental-related expenses, within strict limits.

Overall, if you are looking to rent your home or apartment, it is very important that you check with your tax professional before putting your property into a rental program. Your tax professional will explain the best form of record keeping and what you will need to provide to them when it does come time for them to prepare your tax returns.

This article originally appeared as a column for the Cleveland Jewish News.

2023-11-10T13:38:07-05:00June 20th, 2021|rentals|
Go to Top