Rental Property: New Tenant Or Sell And Invest Profit?

Added February 20, 2009 by Ilyce R. Glink

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Summary: A widow's tenant has moved out of her rental property after 12 years- should she get a new tenant or sell the home and invest the profit? Ilyce goes through several options including selling the home and investing the profit, or getting a new tenant. Ilyce recommends talking to a tax advisor and finding out which would be in the widow's best interests - renting the property to a new tenant, or selling the home and investing the profit.

Q: My Mom has been a widow for 2 years. She now lives on Soc. Sec. ($420 per month), rental income ($400 per month) and about $125 monthly from an annuity. A couple of days ago, her tenant of 12 years gave notice that she is moving out. For tax purposes, the rental house is assessed at $36,000; there is no mortgage. The only expenses are the taxes ($600 per year) and periodic maintenance. The house was recently painted, new gutters and a new furnace were installed.

Should my Mom keep the property and find a new tenant (she would raise the rent to $500) or should she sell it and invest the proceeds? Could she get a return anywhere near the $400 to $500 per month rent?

ps: You're a great Clark Howard replacement!

A: How much is the house worth? Let's say the house is worth $120,000. She would sell the home, and after expenses probably have about $110,000. Invested at 5% in tax free municipal bonds, she'd clear about $5,000 per year, or about $416.67 per month.

But she'd no longer have to worry about maintenance, etc. and if she needed extra cash, she could sell some of her bonds.

But I don't know what tax liability there might be. Has she depreciated the property? Is it considered an investment for tax purposes? Did she live there for 2 of the last 5 years?

It may be easier simply for her to rent the house and clear the $500 per month. Please consult a tax advisor for more detailed advice.

Jan. 1, 2004.

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