Of all the strategies out there to avoid foreclosure, here's one you may not have thought of: renting out your house.

In fact, renting out the property can be an option in several situations. Moving, but unable to sell your house? Check. Looking to upgrade to a new home but unwilling to take a loss on the current one? Check. Thinking about investing in rental property but would like to claim the homeowner tax deduction? Check.

This strategy is based on a simple fact: renting out your home is usually easier than selling it. Also, because rents have not declined as steeply as real estate prices in most areas, renting can make more sense from a long-term financial perspective as well, particularly when some of the tax advantages are taken into account.

A way to avoid foreclosure

If you're in a tight spot where you could be facing foreclosure, renting could enable you to hold onto the home until you're back on your feet again. Of course, you'll need a place to stay in the meantime, so this strategy works best for someone who has relatives or someone else they can live with for a couple years until things improve. You might also rent out the property if you're relocating to a different community but plan to return within a few years.

If you'd like to take advantage of the low prices in the real estate market to move up to a nicer home but don't want to take a bath on your current one, you might consider renting it out for a few years until the market recovers and you're in a better position to sell. But if you owe more on your current mortgage than the value of the home, you'll likely have to have a tenant lined up before closing on the new one so the lender can be confident you're not trying to "buy and bail" on the old mortgage.

Renting out your current home requires some adjustments. First, you'll need to change your homeowner's insurance to rental insurance. You'll also need to figure out a budget, including mortgage payment, insurance and upkeep, to see what your costs are going to be every month. You'll also need to see what comparable rents are in your area and figure out what you can charge.

Tax benefits of being a landlord

One of the nice things about renting out your current home is the tax advantages. Each year, you can deduct the cost of the depreciation of the structure (but not the land it's on), which is roughly the price of the home divided by 27.5 - the number of years you get to stretch the depreciation over. You can also deduct the cost of repairs, mortgage payment and insurance.

If you eventually sell the house, you have to pay capital gains tax on any gains over the purchase price less depreciations. However, if the home has already lost value, taking the depreciations over several years can help you recoup at least some of your losses, even if you don't wait to sell until the price has fully recovered.

Capital gains considerations

Keep in mind, though, that when you sell you're entitled to take up to $500,000 in gains tax-free for couples, $250,000 for singles, for any home you've lived in at least two of the last five years. So it pays to keep an eye on the calendar - if prices start rising again, you may not want to rent the property for more than a couple years. And since you can't simply evict a tenant at the spur of the moment, you need to design the lease accordingly.

Finally, if you're thinking of getting into the landlord business, you can realize a small advantage by moving into the new home and renting out the old, so you can claim the $6,500 homeowner tax deduction on the new property. But keep in mind you'll have to return a portion of the deduction if you don't stay there at least five years.

It's a good idea to consult with a tax expert before you try renting out your current home, particularly if you're purchasing a new one, just to make sure you keep all the complexities straightened out. There's also a lot of other details about rents, landlord obligations, tenant rights and other issues you'll want to become familiar with before jumping in, a lot more than can be covered in this article. Still, if you don't mind putting in the time and effort to both doing your homework and managing the property, renting out your old home can be an effective real estate strategy.

Published on February 26, 2010