ArcaMax

Q: My husband and I will be eligible for Social Security in the next six months. We want to downsize into a smaller home or apartment community. We live in a large metro area. We are considering renting our current home out rather than selling it. Rents have increased significantly and it would provide better income than a bond or CD. We are both healthy and not afraid of maintenance and our home is in great condition. What is your opinion?

A: Your rental-versus-CD comparison is missing two numbers that could matter more than the yield itself and both start counting down the day you move out.

The first is the clock on your biggest tax break. Under Section 121 of the tax code, married couples can exclude up to $500,000 of gain when they sell a primary residence, but only if they've owned and lived in it at least two of the last five years. If you move out and rent it, you generally have about three years before you no longer meet that requirement. Rent it for five, 10 or 15 years, then decide to sell without moving back in, and you generally won't qualify for that exclusion. On a long-held home in a large metro area, that's very likely a six-figure tax bill you'd never face by simply selling now. Clicking on "owned and lived in it" takes you to the IRS rules.

The second number: any depreciation you claim while renting doesn't just disappear when you eventually sell. It gets recaptured and taxed at up to 25%, even within that three-year window, even if the rest of your gain qualifies for the exclusion. Clicking on "recaptured and taxed at up to 25%" takes you to the IRS rules.

Then there's the part your Social Security timing makes worse, not better. The IRS decides how much of your Social Security benefit gets taxed based on "provisional income," which includes your net rental income. The thresholds that trigger this -- $32,000 and $44,000 combined income for a married couple -- haven't been adjusted since the 1980s and 90s. Becoming landlords in the same six months you start drawing benefits is exactly the kind of new income that can push a chunk of your Social Security into taxable territory, on top of whatever tax you already owe on the rent itself.

Now the comparison you actually asked about. Top CD rates this month run around 4.5%, federally insured within applicable limits, zero maintenance, zero tenant risk. Your rental yield needs to clear that hurdle after property management or your own time, insurance (which runs meaningfully higher on a rental than a homeowner policy), vacancy between tenants, a maintenance reserve and the eventual tax bill above, not before.

None of this means don't rent it. It means run the real, after-tax numbers before you decide, not the gross-yield-versus-CD math you're using now. And weigh the honest question underneath it: you're downsizing to simplify your life. Landlording, even for two healthy, handy people, adds a phone that can ring at 11 p.m. right as you're trying to remove that kind of stress.

Talk to a CPA and a real estate attorney before you list your current home for rent instead of sale; many offer a free initial consultation and ask them to run your specific numbers against both paths side by side.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @montgomRM or DearMonty.com.

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