Should You Rent Or Own?
Sarah is thinking about selling her home, where she has operated her photo studio for seven years, and becoming a renter.
In her area, the rent for a dwelling comparable to the one she now owns, would amount to about the same as the monthly payments on her first mortgage.
Would it make sense for her to sell at a time when the real estate market is strong, and move into a rental unit?
It all depends. She needs to consider a number of factors. First off, the tax rules on selling your home would reduce the basis (costs, in most cases) by the amount of previously claimed depreciation. For example, say her studio comprised 1/5 of her house. She would be allowed depreciation on only 1/5 of her home and this would reduce her basis. For an explanation of these complicated rules, getIRS Publication 587, "Business Use of Your Home" under the section, "Office-at-Home Deduction".
Another useful publication is IRS Publication 523, "Selling your Home". Both publications are available by calling 1 800 - TAXFORM.
Would remaining an owner make sense? Possibly, if home prices continue to rise and her property's appreciation exceeds what she could derive from investing the proceeds of the sale.
But home prices do not move in only one direction.
Say she sells and pays off those debts. Less of her stock photography income is siphoned off by debt payments, which means she finally has funds available for investing in new digital equipment.
Other subjective questions might be: Will the landlord be responsive when something goes wrong? How well will Sarah get along with neighboring tenants?
Renting could be advantageous for Sarah and lots of other similarly situated individuals. When it comes to the income tax rules, however, which definitely favor home owners over renters, my answers are more concrete.
Assuming she sells, Sarah qualifies for an "exclusion", meaning escape from taxes of as much as $250,000 in profit on home sales for single filers. The exclusion doubles to a full $500,000 for married couples filing jointly. Remember, that's profit, not sales price.
Some stipulations: (1) Sarah must own and live in the property as her principal place of business for at least two out of the five years before the sale date; and (2) at least two years must have elapsed since she last used the exclusion. As she's been there for seven years, she's relieved of any taxes on her profit.
What about renting? She no longer has itemized deductions for real estate taxes and interest on home mortgages.
Whether as a home owner or renter, other possibilities for itemized deductions are: charitable contributions; state income taxes; uninsured medical expenses that exceed 7.5 percent of her adjusted gross income, casualty and theft
To get any benefit from itemizing, Sarah's total has to exceed the standard deduction that she would get anyway. For someone like her (single and under age 65), the standard deduction for 2001 is $4,550 for an individual with the filing status of single, and $6,650 for a head of household. Those figures are adjusted for inflation and will increase for 2002.
What do all those numbers mean? To the extent of her standard deduction, Sarah's itemized deductions are wasted. Moreover, her standard deduction might be greater in any case than her itemized deductions, if they're largely limited to real estate taxes and mortgage interest.
Julian Block, a former IRS agent and tax attorney, is the author of "Julian Block's Tax Avoidance Secrets" ($29.95 p&h included, 560 pgs. Mention you are a PhotoStockNotes subscriber and receive the book for $19.95. Julian Block, 3 Washington Sq, Larchmont NY 10538-2032). For Julian's tax saving and tax planning reports, go to http://www.photosourcefolio.com/TaxReports.htm. Julian can be reached at julianblock@yahoo.com.
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