Owning a rental property can bring a range of valuable benefits. Savvy landlords can create a reliable flow of passive income. The property may also appreciate in value and become an excellent investment vehicle. There can also be tax benefits to owning a rental property. However, there might come a time when selling the property makes sense in terms of both one’s business and personal situation. If and when that time comes, property owners should consider the following.
#1 Guide to Selling Rental Property
Consider Your Motive
Start by considering the reason behind your decision as well as your current life circumstances. Have you reached retirement age when you’ll begin to collect Social Security, Medicare, or tap into retirement 401(k) or IRA accounts? Has the property appreciated and you want to cash in on the value? Are you simply tired of dealing with the responsibilities of being a landlord? These are all valid reasons for wanting to sell a rental property.
Timing the Sale
Is the real estate market on an upswing? Is it a seller’s market? Is the property making less income than it once did, or does it suddenly need a lot of work and upkeep? Is its depreciation tax value no longer applicable? Is the neighborhood deteriorating, making it more difficult to find desirable renters? These can all indicate a good time to sell.
Choosing the Best Buyers to Target
Will you be purchasing a different property after the sale, or exiting the rental market altogether? If you’ll be selling a difficult property that needs work, selling it to a real estate investor who is open to taking care of this added workload could expedite the sale.
How to Avoid Capital Gains Taxes
Selling a property in order to have the income to buy another can save you the tax burden from the sale through something called a 1031 Exchange. This tax advantage will allow you to avoid capital gains by immediately rolling and re-investing the funds into another rental property. The proceeds should go into an escrow account, and the new property must be selected within 45 days. There’s also a limit of six months to complete the new rental property purchase. Because of this, it’s ideal to have a new property lined up before selling your current one.
More Tax Considerations
Rental property capital gains taxes cost quite a bit more than taxes from the sale of a property for personal use. Capital gains paid on your profits are also increased by the depreciation you’ve claimed against the property. If it lost money and this loss was applied against past tax bills, be prepared to pay a larger bill after the sale.
Incorporating a rental business before selling can offer both legal protections and tax benefits to property owners. Landlords should consider it, especially if they own more than one rental property.
Is Selling Your Only Option?
Those selling a rental property should bear in mind that there may be other remedies to their concerns besides selling the property. For example, if renting the property has become tedious but it’s still profitable, hiring a property manager to take over can be a viable solution. Many of these services will also manage routine and major repairs for a fee.
Selling a rental property is a major decision and one that should be carefully considered. The tax implications can be significant; however, there are ways to mitigate the impact. Use these guidelines when selling a rental property and maximize your benefits.