Sellers: Thinking of Renting Until the Market Improves?

Many people who want to sell their home become discouraged with the low-ball offers and the difficulties buyers experience getting financing. Over half of the sales in Tucson are foreclosures and short sales, and these sales must be used as comparable sales on the buyer's appraisal. The result is, non-distressed sellers are seeing their property values dragged down by the ongoing flood of distressed sales.

Eventually every frustrated potential seller considers the idea of renting their house until the market improves. They usually hope this will be in two years or less.

I won't pretend to predict whether we will be through the huge backlog of foreclosures in the next two years. Some prognosticators claim their crystal balls say we will. Others state just as convincingly that we won't.

Suppose prices are still bumping along the bottom two years from now? At that point, the homeowner becomes ineligible for the waiver of capital gain tax on the sale of their home.

Currently, if a person or couple has lived in a house for two of the past five years, they enjoy tax-free capital gain up to $250,000 for a single person, and $500,000 for a married couple. Once the house has been a rental for two years, any capital gains will be taxed at whatever the capital gain rate is. Currently, it's 15%.

While the house is a rental, the sellers will probably have expenses for repairs and maintenance. They may also have no rent in months when the property is vacant or the tenants aren't paying the rent.

Waiting for the market to improve may be a viable strategy, but sellers need to consider that the risks and expenses may outweigh the potential benefit.