Selling A Rental Property: A Complete Guide
Real estate investing comes with a lot of ups and down, and the day may come when you’re ready to sell your rental property. But selling an investment property isn’t as simple as selling a primary residence.
If you want to get the highest return on your investment, you should go into this process prepared.
When To Sell A Rental Property
You invested in real estate to create a consistent source of passive income, but now you’re ready to move on and put your money elsewhere. But you may be wondering, when is the right time to sell a rental property?
That really depends on how much equity you have in the property, and whether you’re in a buyer’s market or seller’s market. For example, let’s say you’ve owned the property for a long time and have a significant amount of equity built up. It may be worthwhile to sell your investment and access your equity now.
And if you’re operating in a seller’s market, you may want to sell your home while the demand from buyers is still high. If it’s a buyer’s market or interest rates are rising, you’ll have less leverage when you go to sell the property.
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5 Tips For Selling An Investment Property
There are many different areas to navigate when you’re selling a rental property, including capital gains taxes and tenants. Here are five tips for selling an investment property.
1. Evaluate The Rental Property
If you’re ready to get rid of the rental property as soon as possible, it may be tempting to list it on the market immediately. But if you want to maximize the return on your investment, you should take time to evaluate the home and make any necessary repairs first.
These repairs will help the property sell for a higher price. From a tax perspective, the IRS looks at improvements to the property as adjustments to the cost basis of the home from a capital gains standpoint when selling, but basic repairs that are required are not tax deductible.
2. Honor The Lease Period
If the rental property currently has tenants living there, this complicates your decision to sell. While you can sell your property with tenants living there, most states will give them the right to remain in the property until after the lease expires. Marketing and showing the property will be more difficult if the property has tenants and may turn some buyers away. In general, it may be best to wait until their lease expires before selling.
3. Understand The Capital Gains Tax
If you sell an investment property, you’ll have to pay a capital gains tax on any profit you earn from the sale. If you’ve owned the property for less than a year, your capital gains are considered short-term and they’ll be taxed at the same rate as your income. So depending on the tax bracket you fall into, you could pay anywhere between 10% and 37% of your profit in taxes.
If you’ve owned the property for more than a year, it’s considered long-term capital gains and will be taxed at a lower rate. this will depend on how you file.
One way to defer paying the capital gains tax is with a 1031 exchange, which gives you the opportunity to reinvest the money and reduce the amount of profit you’d pay capital gains on. This involves selling your current rental property and then buying another property you plan to rent out. If you plan to take advantage of the 1031 exchange, you have 45 days to designate three potential properties and 180 days to close on one of them. When it comes to taxes, it’s recommended you speak to a financial professional or tax advisor.
4. Know The Current Housing Market
It’s important to understand the current housing market and what it might look like when it’s time to sell a real estate investment property. For example, if interest rates are rising and there is an abundance of properties on the market, it may be harder to sell quickly and get the price you want.
But if you’re operating in a seller’s market and there’s high demand, you’ll have more leverage when negotiating with buyers and may sell the property quicker.
5. Work With A Real Estate Agent
Finally, it’s important to hire a real estate agent to help you sell the rental property. The right real estate agent can help you sell the property faster and earn more on the sale.
The 2022 National Association of REALTORS® Profile Of Home Buyers And Sellers found that agent-assisted homes sell for a median of $345,000. In comparison, the median for For Sale By Owner (FSBO) homes was $225,000.
Selling A Rental Property FAQs
If you have additional questions about how to sell your rental property, the following information may help.
Can I avoid capital gains tax when selling an investment property?
You can’t avoid capital gains tax, but you can defer it. The best way is to do a 1031 exchange. This involves selling your current investment property and using the funds to purchase a property of like-kind.
What expenses are deductible when selling a rental property?
When you’re selling a rental property, certain expenses may be tax-deductible. For example, your advertising costs, repairs and maintenance, and legal and professional fees could all be tax-deductible. Make sure to keep good records of your expenses so you’ll be prepared come tax season.
What happens to depreciation when selling a rental property?
When you sell an investment property for a profit, you’ll owe a depreciation recapture tax. That means you’ll owe the lesser of your current tax bracket or 25% plus state income tax on any depreciation you claimed. However, you can defer this tax by doing a 1031 exchange
The Bottom Line
Selling an investment property may be a common practice, but it’s more complex than selling a primary residence. But with the right information and resources, you can make the most of your sale.
For instance, if earning a solid profit is your goal, then you’ll want to work with a qualified real estate agent. If you’re at the beginning of your real estate investing journey, you can get started exploring your financing options.