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posted: 2/15/2013 5:46 AM

The pros, cons of renting home instead of selling

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There are advantages and disadvantages for owners who consider renting their home to tenants instead of choosing to sell it.

Q. I got a new job in another city, and I have to report there in two weeks. That is certainly not enough time to fix up my current home to put it up for sale, much less find a buyer and close the sale. Would it be a good idea to rent the place out to cover my mortgage until I can get it spruced up and put it on the market?

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A. I can understand your concern about paying the mortgage on your current home while you're living somewhere else, but don't make the decision to rent the place to tenants until you weigh all the pros and cons.

On the upside, the rental income the property would generate could indeed go a long way toward covering the mortgage payments, or might even provide a small profit. That's a particularly important point to consider if sales in the area are slow and it could take several months to find a buyer.

Having a tenant in the property also would greatly reduce the chance that the home would be vandalized or even become the target of squatters -- a fairly common problem that occurs when a house stands vacant for an extended period of time. You could even offer a lease-option contract, which would allow the tenant to initially rent the home and choose to buy it at a pre-specified price at a later date -- a move that would allow you to avoid the hassle of marketing the home to the public and the cost of hiring a real estate agent.

Now, the drawbacks: As I've written before, it's hard to be a "long-distance landlord." You won't be around to check the property often or to make minor repairs, and hiring a property-management company to do such chores for you likely would be an expensive proposition.

Of course, there's no guarantee that even the most carefully chosen renter won't later become the proverbial "tenant from hell" who decides to trash the home or refuses to pay the rent. And marketing a property that is occupied by tenants can be difficult, especially if they won't cooperate with agents who want to tour the home with prospective buyers or don't keep the place clean and in good repair.

If sales in your local market are strong and you have enough savings to cover at least two or three months of mortgage payments, I'd lean toward hiring a contractor now to make any needed repairs and cosmetic improvements right away and then put the vacant home up for sale with the help of a good real estate agent. But if sales are slow or you don't have much cash, you may have no choice but to find a tenant and rent the property out until you eventually find a buyer.

Q. I bought my first home last year, so now I'm looking forward to saving lots of money through my new deductions for mortgage-interest payments and the like on my income-tax return. I received a form from the bank two weeks ago that shows that I paid $4,918 in interest last year. But what's to prevent me from claiming even more, so I can get an even bigger tax refund?

A. If your own conscience won't prevent you from lying on your tax return in an effort to boost your refund, perhaps an explanation of how the Internal Revenue Service collects data about your mortgage-interest write-offs -- and the dangers of trying to inflate them -- will persuade you to tell Uncle Sam the truth.

The notice you received from the bank is the government-mandated Form 1098, a copy of which you must attach to the tax return that you file by April 15. Lenders also file the information directly to the IRS's massive computer system, which then automatically compares it with the amount of mortgage-interest payments that you claim on your return.

This system is nearly foolproof, and trying to beat it by intentionally inflating your interest charges almost surely would invite an IRS audit -- not just of your interest charges and other real-estate-related deductions, but perhaps even a line-by-line review of every other write-off you claim.

If the audit shows that you purposely misrepresented your deductions or income, you will certainly get hit with hundreds or thousands of dollars in penalties and fees on top of the back-taxes that you will owe. You could even go to jail for tax evasion.

Q. We are interested in buying a home "for sale by owner." Does this mean that we cannot make the offer through a real estate agent of own?

A. No; you can make an offer through your own agent even though the seller isn't using one.

Many sellers choose the "for sale by owner" route because they don't want to pay the typical 6 percent sales commission to a listing agent. But they'll often agree to pay a 3 percent commission to an agent who produces a buyer, in part because they don't want salespeople to effectively boycott their property by refusing to show it to their clients.

REAL ESTATE TRIVIA: The German government has launched a program to sell about 150 large, concrete bunkers built by the Nazis during World War II to real estate developers. Already some have been converted into apartments and museums -- even a disco.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers, P.O. Box 4405, Culver City, CA 90231-4405.

2012, Cowles Syndicate Inc.

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