Rent vs. Sell: Evaluating Landlord Cash Flow & Return on Equity (ROE)
When relocating or upgrading to a new primary residence, homeowners face a critical financial decision: liquidate home equity today or retain the property as a long-term rental.
The Landlord Return on Equity (ROE) Equation
ROE (%) = [Annual Net Rental Cash Flow ÷ Net Immediate Sales Equity] × 100
*If your Return on Equity is under 5% to 6%, your home equity is working inefficiently as a rental and would likely generate superior, hands-off yields invested elsewhere (such as index funds or high-yield bonds).
Section 121 Capital Gains Exclusion
If you lived in the property for 2 of the last 5 years, you can exclude up to $250,000 (single) or $500,000 (married) in capital gains tax-free. Converting it to a rental long-term may cause you to forfeit this exclusion.
Depreciation Recapture Rules
Rental properties allow annual 27.5-year straight-line building depreciation deductions. However, when you eventually sell, the IRS taxes accumulated depreciation at a 25% recapture rate.
