I am an
accidental landlord, in that I became a landlord due to life circumstances rather than deliberately investing in real estate for the purposes of renting it. I mention this because, based on recent conversations here on this forum, I now realize that this house isn't really ideal for a rental. This is mainly due to crazy-high property taxes: after those, plus manager commissions and other misc expenses, I only net about 40% of the rent. This works about to be about a 3.3% "dividend" return on the purchase price.
My property manager mentioned that the current tenants have dropped hints that they might be interested in
buying this house when the lease is up. So, that combined with the mediocre profits makes me wonder if I should sell.
One big question I have: I vaguely remember hearing something along the way about, if I were to sell, having a liability to the IRS for the depreciation expenses I've claimed over the years? If there's any truth to this, can someone point me to a reference?
Some other considerations:
- I have no idea what the house is worth now. I bought it in 2004, and at the time it was only about four years old (i.e. only about 12 years old now). Zillow thinks it's currently worth about 3% less than I paid for it (and I put some nice hardwood flooring in when I lived there, before it was a rental).
- My understanding of my taxes is that I currently pay no taxes on the rental income (yes, I shamefully admit to outsourcing my taxes, will address this at some point). Basically, for the first two or three years I rented, I still had a mortgage. That, combined with property taxes, depreciation, maintenance and commissions meant I ran it at a loss for several years. That loss is being carried forward, and based on the amount, I won't owe taxes on this rental income for at least three more years.
On the one hand, as long as it stays rented, I feel I should not sell until I can
at least break-even on the sale price (meaning after taxes and commissions are paid). If Zillow is right, if I sold now, I'd lose money on the sale, especially after factoring in all the closing costs (and paying back the IRS for depreciation?).
On the other hand, if the current tenants move out for whatever reason, I have a vacancy risk that would only further erode my profits. I think this is fairly minimal, as their lease is up in May, which should be as good a time as any to find tenants. But you never know!
Basically just soliciting thoughts.