Move-Up Buyers: Why Renting Your Old House is an EXPENSIVE Mistake

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Considering a move to a new, bigger home in Orange County? You might be thinking about renting out your current property for passive income. However, as your local real estate expert, Lucas Smith, I advise caution. Renting your old house might not always be your best move, and here’s why.

Tax Implications

Selling your primary residence allows significant capital gains tax exclusion (up to $250,000 for singles, $500,000 for married couples). Converting it to a rental can jeopardize this exclusion later, and you'll still owe taxes on recaptured depreciation upon eventual sale. Consider the immediate tax benefits of selling now.

Landlord Responsibilities

Being a landlord carries significant responsibilities, especially in California. Expect time-consuming management, potentially costly eviction processes, and ongoing maintenance, particularly in Orange County’s coastal climate. Increased liability and specialized insurance are also key considerations.

Financial Considerations

Financially, capital tied in a rental could be better used for your new home’s down payment or renovations, potentially improving mortgage terms. A rental property can also impact new home financing by affecting debt-to-income ratios. Compare potential rental income to current market selling gains, as fluctuating rental markets risk vacant periods and lost income.

HOA Restrictions

Be cautious of HOA restrictions in Orange County; many prohibit or limit rentals, potentially leading to fines and legal issues if violated.

The Emotional Toll

Managing a rental from afar adds stress. While your old home may hold sentimental value, a clean break can be emotionally healthier for starting a new chapter.

Alternatives

Consider alternatives like a leaseback for short-term transitions. Other investments (stocks, bonds, mutual funds) may offer better returns without landlord responsibilities. Selling to a house-buying company offers a quick sale with less hassle, though potentially not full market value.

Bottom Line

Selling your old home frees up capital, avoids landlord burdens, and allows you to maximize capital gains exclusion.

For personalized advice in the Orange County market, call me at 714-844-5696.