Renting out your LA home after you move: the questions to ask first

Not everyone who leaves LA sells right away. Some owners have a low Prop 13 tax base, a low mortgage rate or simply a home they love, and keeping it as a rental feels like the natural choice. It can be. It also changes a few things that are easy to overlook. Here are the questions worth answering before you decide, as general background for a conversation with a CPA and a landlord-tenant attorney. None of this is tax or legal advice.

1. What happens to the home sale exclusion?

Under federal law (IRC Section 121), many sellers can exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, if they owned the home and lived in it as their main home for at least 2 of the 5 years before the sale. IRS Publication 523 explains the tests. Renting the home after you move starts that five-year window moving, so the timing of an eventual sale matters.

2. What about depreciation?

Rental property is generally depreciated for tax purposes, which can reduce taxable rental income while you own it. When the home is later sold, Publication 523 notes that gain equal to depreciation allowed or allowable after May 6, 1997 generally can't be excluded under Section 121. IRS Publication 527 covers rental income and expenses. Ask your CPA how this would work with your numbers.

3. Does my property tax change?

Renting the home out is not a change in ownership, so your Prop 13 base year value generally stays in place. What does change: the homeowners' exemption, which reduces the assessed value of a principal residence by $7,000, is generally only available for a home you live in. The Board of Equalization describes it, and the LA County Assessor handles the paperwork. For more on Prop 13 and Prop 19, see our post on what changes with your property tax.

4. Which rental rules would apply to my home?

This is the question owners most often underestimate. Rules depend on the city the home is in, its age and the type of property. In the City of Los Angeles, for example:

• The Rent Stabilization Ordinance generally covers rental units first built on or before October 1, 1978, with exemptions, including for many single-family homes that are the only home on the lot. RSO units have limits on annual increases and a yearly registration requirement.
• The Just Cause Ordinance can apply to many rentals that aren't under the RSO. Once it applies, ending a tenancy generally requires a reason allowed by the ordinance, and some no-fault reasons require relocation assistance.
• Statewide, the California Tenant Protection Act (AB 1482) adds its own rules for many properties.

The practical point: if you think you might want to sell in a year or two, or move back, find out first what it would take to end a tenancy. Other cities in LA County, such as Santa Monica, West Hollywood and Pasadena, have their own ordinances. A landlord-tenant attorney can tell you what applies to your property.

5. Can I sell it with a tenant in place?

Yes, homes sell with tenants all the time, but it affects the process. Showings depend on proper notice to the tenant, the home may not look its best, and the pool of buyers can be different if the home won't be delivered vacant. Some owners prefer to sell vacant for that reason. It's worth thinking through before signing a lease, not after.

6. What about withholding when I eventually sell?

California generally requires 3⅓% of the sales price to be withheld at closing unless an exemption applies. The principal residence exemption may no longer fit once a home has been a rental for a while. Escrow handles this with Form 593, and the amount is credited on your return. Our post on whether California taxes your sale after you move has more background.

7. Who will manage it?

From another state, the day-to-day becomes someone else's job. Ask what a local property manager would charge in your area, how repairs get approved, and how you'll get a landlord insurance policy in place, since a standard homeowners policy generally assumes you live there. Also check your city's business tax registration rules for rental income.

Running both numbers

For many owners the decision comes down to comparing two pictures: the rent left over after taxes, insurance, management and repairs, against what the equity could do if you sold now. Our guide on whether to keep or sell your LA home lays out the trade-offs, and the calculator shows what your equity could buy in the markets you're considering.

There's no single right answer here. If it would help to see what your home would likely sell for today, so you can compare it with the rental numbers, Tyler is happy to put that together for you. Please verify any tax and legal questions with a CPA and an attorney before deciding.