Don't sell rental house

June 21, 1992|By Carla Lazzareschi | Carla Lazzareschi,Los Angeles Times

Q: My husband and I each owned a house before we married last year and are now trying to decide whether we should continue renting out one or sell it. The house we are renting has a mortgage of about $25,000 at an interest rate of 8.5 percent. Our monthly payment is $343, and our annual interest and tax payments are about $3,000. The house is appraised at about $80,000. We are renting it out for $650 per month but are paying taxes of $1,200 on our profits.

What should we do with it? Sell it? Continue renting it and pay the taxes?

A: If you were to sell the house for $80,000, you would have a pretax gain of roughly $55,000, and assuming a combined state and federal tax rate of about 33 percent, you would have about $37,000. If you invested that in a tax-free mutual fund paying 4 percent, your annual income would be about $1,480. Now, if you keep the house and continue to rent it, your annual after-tax income is roughly $3,650 ($7,800 annual income minus $3,000 mortgage and property taxes and $1,200 income taxes). Furthermore, depending on the real estate market, your investment may still be appreciating.

If you want the cash from the rental home, there is another alternative to selling the house: refinancing it.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.

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