Combining Two Homes Into One in New Jersey: Sell Both, Keep One, or Rent One Out?

When two homeowners combine households, there are three main paths: sell both and buy one home that fits everyone, keep one and sell the other, or keep one and rent the other out. The right one depends on what each home is worth, what each one costs to carry, which one fits the combined household, and the tax picture on each sale. Put those side by side before either house goes on the market.

I'm Dennis Mark Interdonato with The Dennis Mark Group. Two households becoming one is one of the most common reasons I get called in Monmouth and Ocean County, and it's one of the few sales where you start with two houses and two sets of numbers. Here's how we sort it out.

What are your options when you have two houses and need one?

• Sell both and buy one. A fresh start with a home picked for the combined household. It's the most moving parts: two sales and a purchase, often lined up with each other.
• Keep one, sell one. Fewer moving parts. It works best when one home already fits, or can with some work.
• Keep one, rent one. You hold on to the equity and collect rent, and you take on a landlord's responsibilities and a second property to carry.

There's no wrong answer on that list. There are wrong answers for your numbers, and that's what the plan is for.

How do you decide which home to keep?

I put both homes on one page and compare them the same way a buyer would, plus a few things only you can weigh:

• Room. Bedrooms, a work-from-home space, storage, a garage. Does either house fit everything, or does neither?
• Location. Commutes from both jobs, the drive to the people you see most, the beach or the train.
• Cost to carry. Mortgage payment and rate, property taxes, insurance and upkeep. Two homes at similar prices can have very different monthly costs.
• Condition. I'm a former New Jersey home builder and residential remodeler. I'll walk both houses and tell you what each one needs in the next few years, so you don't keep the one with the roof and the furnace coming due.
• Equity. What each home would net after the payoff and selling costs. Start with a free home value for each.

Sometimes the numbers point one way and the heart points the other. That's fine. My job is to make sure you can see the cost of each choice before you make it.

How do you time two sales and a purchase?

There are a few common sequences:

1. Move into one, then sell the other. The simplest when one home will hold everyone for a while. You sell the empty house, which also shows better.
2. Sell both, then buy. You know exactly what you have to spend. You may need a short-term place in between.
3. Line them up. Both sales and the purchase are scheduled together, often for the same day. It takes a tight plan and good communication with two attorneys and a lender. I walk through it in back-to-back closings.

Each owner sells the home that's in their name. If the titles or mortgages overlap, or one of you is moving into a home owned by the other, ask your attorney how ownership of the home you keep should be set up.

What about taxes on each sale?

Each sale is tested on its own under the federal home sale exclusion, so run both past your tax professional. From IRS Publication 523 (IRS Publication 523):

• You may be able to exclude up to $250,000 of gain, or $500,000 if married filing jointly, if you owned the home and lived in it as your main home for at least 24 months of the 5 years before the sale.
• The 24 months don't have to be in a row, and the test looks back from the date of sale. Moving out doesn't end your eligibility on the day you leave, but the window doesn't stay open forever.
• You can generally take the exclusion only once in a 2-year period.
• If a home is rented after you move out, the IRS says that rental time after your last use isn't counted against you, but you can't exclude the part of the gain equal to depreciation claimed while it was rented.

What does renting one of the homes involve in New Jersey?

• Registration. New Jersey requires landlords to file a certificate of registration. For a one-unit rental, it's filed with the municipal clerk, and it lists the owners, an emergency contact and every recorded mortgage holder (N.J.S.A. 46:8-28).
• The alarm certificate. The state fire code requires it before a one- or two-family home is leased, not only when it's sold (N.J.A.C. 5:70-2.3).
• Income tax. In most cases, rent you receive is included in your gross income, and a home converted to a rental is depreciated from the lower of its adjusted basis or its fair market value at conversion (IRS Publication 527).
• The lease and the law. New Jersey's landlord and tenant rules are detailed. Talk to an attorney before you sign a lease, especially if you think you might want to sell or move back later.
• Insurance and the mortgage. Ask your insurance agent whether your policy covers a rental, and ask your lender whether your loan terms allow one.

What mistakes do people make when combining two homes?

• Listing both at once with no plan for where to live.
• Keeping the house with the bigger to-do list because nobody walked it with a builder's eye.
• Paying to move twice. Storage and a second move add up fast.
• Renting it out on a handshake. Registration, the certificate, the lease and taxes all come with being a landlord.

Frequently Asked Questions

Can we sell two homes and buy one at the same time?

Yes. It takes coordination between both sellers' attorneys, the buyer's lender and the title company, and a plan for what happens if one closing slips.

Which house should we sell first?

Usually the one nobody is living in, because an empty, prepared house shows better and frees up its equity. Your lender may also want one sale finished before approving the next purchase.

Do I have to register if I rent out my old house in New Jersey?

Yes. New Jersey requires landlords to file a certificate of registration, with the municipal clerk for a one-unit rental. Your attorney can confirm what else applies.

Can the gain on both sales be tax-free?

It depends on each home's ownership and use, and on the once-in-2-years rule. Your tax professional runs those numbers for each sale.

This is general information, not legal, tax or lending advice. Your attorney, lender and tax professional handle the legal, financial and tax parts of each sale.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. Read more about Dennis Mark.

Keep reading

• How Dennis Mark plans a move around a life event
• Plan it step by step with the free Life Events Guide.
• Two homes, two numbers: start each one with a free home value.
• Taxes on the sale itself: when you sell your home, do you pay tax?
• Have a question this didn't answer? Send it to Dennis Mark and it may become the next article.