Q: We are moving to Colorado, and have decided to rent our house instead of attempting to sell it in this crazy market. Can you give us some suggestions on how best to rent it.
A: The first thing you must consider is the tax consequences of your decision. If you sell your present house, and buy another house within 18 months where the price of the new house is equal to or greater than the selling price of your present house, you will receive a significant tax benefit.
All of the profit you have made from the sale of your present house is deferred. The profit is calculated into your new purchase price and you do not have to pay tax on the property until you sell your last house.
Thus, if you are planning to rent your present house only on an interim basis, you should consult your tax adviser before making that decision. You may find that by renting your house, you have lost the ability to obtain the tax deferment.
Another tax item to consider, is the depreciable basis of your property. If you rent property, you are able to take advantage of a tax technique known as "depreciation." This is paper loss to you, while your property is appreciating.
However, if you purchased your property many years ago, you may find the depreciation tax base is so low that you will not get the full tax benefit from renting your property.
After giving consideration to these tax issues, let's look at the rental issues. First, should you try to rent your property yourself, or should you use the services of a real estate agency?
Part of the decision depends on your own time limitatinos. If you are not pressed to leave for Colorado, you certainly should make an effort to rent your house yourself. The rental market here appears to be getting stronger, especially since houses are becoming more and more expensive, and mortgage money is hard to find.
Determining your monthly rental is not difficult. Ask a few real estate agents for their opinions.
Review several back issues of the real estate classified ad pages to obtain comparable rentals in your neighborhood. Your friends and neighbors may also be renting out their houses and you should discuss the rents with them.
Once you have determined a comfortable rental value, take out a classified ad in the newspaper. Plan to hold your house open on Sunday, since this is a convenient time to meet prospective tenants. You may also want to advertise "by appointment only," but this can become a time-consuming process if you have to meet with different tenants at different times.
Can you refuse to rent to groups? You have the right, but this is a very delicate area, and you must use discretion. Clearly, the property is your home, and you have the right to select whom you wish -- without discriminating on the basis of race, color, sex or religion.
You may want, for example, to prohibit groups of four or more, yet allow a threesome to be your tenants.
Before you begin the advertising process, it is important for you to pick up some standard lease forms.
Check with your attorney to determine whether there are any particular rules you need to follow in your jurisdiction. For example, the security deposit rules vary from jurisdiction to jurisdiction. Additionally, rent control restrictions in the District may affect your particular situation.
After you have found a prospective tenant, have that tenant sign a lease, giving you a security deposit or at least one month's rent. Many advisors suggest that the security deposit should not be identical to the monthly rental, so that it cannot be treated as the last month's rent. Obtain the following information from your prospective tenant:
Where does the person presently live, and what does he or she now pay for rent:
Where does the prospective tenant work, and what is the current salary?
Where does the person bank? This latter question will probably be obvious if you receive a security deposit in the form of a check.
Before you sign the lease, call and confirm the employment and previous rental situation. Although most employers will not volunteer information on their employers, they will confirm information you have received.
If you are satisfied that the information given you by the prospective tenant checks out, sign the lease. Let your tenant know that you will be making periodic checks of the property, and make sure that the lease permits you this right.
Since you will be out of this area, yu may want to consider turning the rental over to a real estate agent or to a friend, so that you need not be bothered with the emergency telephone calls that may come from your tenant.
If you do delegate responsibility, however, set a maximum dollar limitation on the authority of your agent. You do not want to give the agent carte blanche to make repairs without your permission.