Sell It or Rent It Out? The Math Most Owners Skip

Should I sell my house or rent it out?

The instinct is usually to keep it. You have a low rate, the payment is manageable, and selling feels like giving something up.

Sometimes keeping it is right. But the decision is usually made on feel, and there are three hard numbers that should drive it instead. The first is a clock, and it is running whether you look at it or not.

The capital gains clock

This is the one that gets missed.

The IRS lets you exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 filing jointly. To qualify you must have owned the home for at least 24 months and used it as a residence for at least 24 months within the five years ending on the sale date, per IRS Topic 701.

Read the window again: five years.

Rent the house out for three years and you still have two years of qualifying use inside the window. Rent it out for four, and you have run out of room. The exclusion is gone, and in a California market where an owner from 2015 may be sitting on several hundred thousand dollars of gain, that is not a rounding error.

So "rent it for a while and see" has a deadline attached. If you are going to rent it, know exactly when the clock expires and decide before it does, not after.

None of this is tax advice and your situation may have wrinkles this does not cover — depreciation recapture and partial-use rules both exist. Talk to your CPA. But go into that conversation knowing the five-year window is the thing to ask about.

What the house actually nets as a rental

Owners estimate this by subtracting the mortgage payment from the market rent. That is not the number.

The real calculation subtracts:

• Principal, interest, taxes and insurance — and landlord insurance is not homeowner's insurance
• Vacancy, at a realistic rate, not zero
• Maintenance and capital reserves — a water heater and a roof are not surprises, they are scheduled events you have not scheduled
• Management, whether you pay someone or do it yourself; your time is not free
• The eventual turnover cost: paint, carpet, cleaning, and a month of no rent between tenants

Run that honestly and a house that looked like it cleared a few hundred a month sometimes clears nothing. A house that genuinely does cash flow is a real asset and worth keeping.

The point is to find out which one you have.

The rules you are signing up for

Becoming a landlord in California means operating under the Tenant Protection Act. Per the California Attorney General, the statewide cap limits annual increases to 5 percent plus the change in the cost of living, to a maximum of 10 percent, with one increase allowed in any 12-month period. Just-cause eviction protections attach after a tenant has been in place for a defined period.

Most single-family homes and condominiums are exempt from the caps, unless owned by a corporation — but the exemption is conditional and depends on proper written notice in the lease. Get that wrong and you do not have the exemption you thought you had. Housing with a certificate of occupancy issued within the last 15 years is also outside the caps.

Local ordinances can be stricter than the state floor. Check your city.

The question underneath the question

Most owners asking this are really asking something else: am I going to regret selling in this market?

That is a fair worry and it deserves a straight answer rather than reassurance. Nobody can tell you where prices go. What you can know is your own position: your equity, your rate, your gain, your five-year window, and whether the house cash flows as a rental after honest expenses.

A good decision is one where you would be comfortable either way, because you ran the numbers before you had to.

What to do this week

Ask for two things. A seller's net sheet, so you know what selling actually puts in your pocket after payoff, transfer tax, title and escrow. And a rental analysis with real vacancy and maintenance assumptions in it, not a gross rent figure.

Put them side by side with your CPA's read on the five-year clock. The decision usually makes itself at that point.