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.