I have high income, spouse doesn’t work, should we rent our home?

Question

I recently bought a home and some life changes make it a less than ideal residence. I absolutely love the home and the location is iconic. Even if it doesn’t appreciate in value, I would have a hard time letting it go and would rather rent it. My realtor tells me, that I can cover my mortgage and then some (probably break even after maintenance).

My spouse is a non working attorney and I have a high income W2 job which is as steady as it can be.

I did a mock tax return on turbo tax, classifying my wife as a real estate professional and incredibly it knocked my marginal tax rate to 9% (from 28%). Is this really possible? Am I crazy to not rent out my home and buy another in a better suited location for my primary residence?

My biggest concern is if you calculate cash on cash return in this scenario, it’s only 0-1%/year. What am I missing in how I think about my tax benefits? Am I better off with my down payment money in an index fund for example?

Paul Jump · Answer

The part of my spouse not currently working is that she can be classified as a real estate professional and we can use write off taxes, interest, and depreciation to offset my W-2 income up to $500k/year.

Theresa Harris · Answer

There are a lot of variables to consider. First is will the rent cover all the expenses? Second, can you borrow more money for a second home while still keeping the first? Then there are tax implications. You have so long after you move out and turn it into a rental while you can still use your capital gains exemption. For tax purposes, you will pay taxes on any profit from the rental. Your home may not appreciate, but your tenant is paying down your mortgage.

As for your spouse not working, plenty of us are single and still own rentals.

I have high income, spouse doesn’t work, should we rent our home?

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