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If You Can't Find A Buyer, Find A Tenant


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IF YOU CAN'T FIND A BUYER, FIND A TENANT

Making that gem of a new job 1,000 miles away has one hitch: What if you can't sell your house? In a stagnant market, homes are languishing unsold for months--even years. Sure, you can move and leave the old place vacant, hoping a buyer will materialize eventually. But carrying two residences is an expensive act of faith. Worse, an empty house is a vandal's delight. And if a pipe bursts, who'll call the plumber?

Renting your old house is one alternative. A tenant will subsidize the property, giving you the luxury of waiting out bad times and selling when the market recovers. And it's reassuring to know someone is there to look after things.

How much rent should you charge? Ideally, enough to cover your carrying costs: mortgage payments, property taxes, and miscellaneous upkeep. In toting up your expenses, remember that rent receipts are taxable income.

Sign up with a real estate agent who will find you a tenant and who knows the local going rates. Agents typically collect a fee equal to one or two months' rent, which means they have an incentive to make the rent as high as possible. Tenants should pay for heating, electricity, and water. That way, if they stoke the furnace until the house is like a sauna, the bill is their problem.

Unfortunately for you, a soft sales market usually means a soft rental market, too. Result: You may have to charge a rent lower than your carrying costs. But keep in mind that your aim is not to make a killing. Breaking even is a worthwhile goal.

The tax code is helpful here. You can deduct losses on rental income, within limits. And since the house is now a business, you can deduct expenses--from fixing the wiring to advertising for a tenant. You can take at least one deductible trip a year to inspect the place. You can depreciate the property on your tax return, too, taking off 3.5% of its cost the first year and 3.6% yearly after that.

Tax breaks carry certain restrictions, so do some math first to see if they're worth taking. Landlords earning more than $150,000 a year from all sources can't deduct rental losses until the house is sold, warns Nadine Lee, a partner at Ernst & Young. The exception is if you record a gain one year from the rental property. In that case, you can deduct previous years' losses without selling the house. People with income less than $150,000 can take yearly deductions with no curbs.

Depreciation has a pitfall, too. It brings a bigger taxable capital gain when you sell the house. Let's say you've been depreciating your $200,000 rental house for six years and then sell it for $230,000. You won't get away with reporting only a $30,000 gain. On paper, depreciation has knocked down the value by 21.5%, to $157,000. That translates to a $73,000 gain.

HEADACHES. The tax code provides an additional reason not to let rentals go on forever. You can roll over the capital gain on your old house into the purchase price of your new one without tax penalty--but only if you sell the old one within 24 months. The Internal Revenue Service allows some leeway on this, but not often. "The IRS wants to make sure that the rental was temporary," says Ernst & Young's Lee.

As a landlord, your biggest worry is the tenant. "I'd be very nervous about owning an asset worth tens of thousands of dollars and having no control over it," says Harley Rouda, president of the National Association of Realtors. To be safe, get two months' security deposit and, before signing the lease, do a credit check on the tenant. If you have moved far away, you may want to hire a leasing agent to check up on the tenant, collect the rent, and take care of emergency repairs. The agent can charge from 5% to 15% of the rent.

Since your ultimate objective is to sell the house, make sure your written lease forbids the tenant from making renovations. A tenant is not a plus when you're showing a house for sale: His idea of swank decor may look like a nightmare to prospective buyers. Your agent should prevail on the tenant at least to keep the house tidy. Or you can, for a reduced rent, get the tenant to show the house. Synchronizing the end of the lease and a sales date is tricky. If you want the tenant to move out on limited notice, expect to lower the rent yet another notch.

A still better deal to strike with a tenant is renting with an option to buy. That way, you don't have to worry about scaring up a purchaser. This arrangement gives the tenant some time to get financing together. But beware of agreeing on a price: The figure may be too low a year later, if the market has come back.

You can circumvent all these woes if your employer hires a relocation service, which buys your house and finds you a new one at the other end. Don't abrogate your rights as a seller, though, to get the best price. "They'll want to pick it up for a bargain," says Richard Glachman, chairman of First Northern Bank in Garden City, N. Y. You should test the service's offer by independently seeking other bids.

Moving is one of life's most stressful events. And dealing with a bad sales market makes it more unpleasant. But there's no excuse for taking a financial beating on your old house.

RENTING HAS ITS ADVANTAGES...

House produces income instead of sitting vacant

Sale is delayed until the market improves

Expenses and any losses are tax-deductible

Owner gets tax write-off for depreciation

...BUT THERE ARE DRAWBACKS, TOO

Keeping the house rented isn't always easy

Monitoring a tenant's upkeep is a chore

A tenant-occupied house is harder to sell

Write-offs may bring a bigger capital-gains tax

DATA: ERNST & YOUNG, NATIONAL ASSOCIATION OF REALTORS, BWEDITED BY AMY DUNKIN Larry Light


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