Leasing home protects future benefits
Moving from one house to another in a series of job relocations may take one of two forms. In one case an executive on the way up in a major, possibly international, corporation may assume different jobs at varied locations. Little likelihood of returning to any of those locations precludes retaining an investment in a home not currently occupied.
In other cases an executive or government administrator may be temporarily relocated from a main base for periods of one or two years or more. These temporary assignments usually hold out the distinct possibility of returning to a home office.
One consultant maintained a home in the area he preferred living in. Once he changed jobs for a permanent relocation in another state. But instead of selling his house, he leased it. After a two-year trial, he elected to return to his home base. Another time he accepted a one-year contract that extended to 15 months, but there was a known end date when he would return. Similar long- term assignments occurred on two other occasions. Throughout all of these moves , he retained the original house, leasing it during the times he and his family were living elsewhere.
Numerous alternatives may confuse the decision to sell and rebuy or to lease with the expectation of returning. In the case of the executive unlikely to return to a specific location, selling, deferring the gain, if any, and rebuying in the new location is the preferred option. Attempting to manage a property at a remote location can be costly or risky, or both.
When relocations are likely to be limited, with the prospect of returning to a home base, leasing offers substantial benefits:
First, losses of exchange costs on the sale of a present home and purchase of another in the new location can run at 15 to 18 percent. Settlement costs including commissions are payable in cash -- usually from the equity accumulated in the house being sold. While the equity may have appreciated, the new house will likely cost more also. Thus, the dollar outflow represents a substantial loss.
Second, income from the lease could provide substantial tax benefits as long as the lease period covered at least 12 months. During the period of the lease all expenses, including noncash depreciation, are deductible. You can depreciate the house, exclusive of land, using whichever is lower: fair market value or the adjusted basis and an acceptable life, depending on the age of the house. You may find that the depreciation generates tax savings that offset other income. Ask your accountant to work out the actual figures.
If you return and live in the house again until age 55, you can take advantage of the capital-gain exemption, provided you meet other requirements, mainly having lived in the house at least three of the five years prior to the sale. Capital gain will be figured from a lower basis, as depreciation charged during the years you leased the house decreases the basis.
If you should decide to sell the house after leasing it for several years, capital gain will be figured on the lower basis, depending on how much depreciation was charged during the leasing years. The big tax advantage in this procedure results from charging depreciation against ordinary income and paying a capital gain tax on the greater difference resulting from the lowered basis. Currently only 40 percent of long-term capital gains are subject to income tax at ordinary income rates.
Thus, if there is even the fair possibility that you may return to a current location after one or more remote assignments, you're likely to be far better off leasing the house in the interim rather than selling and rebuying elsewhere.