There are many different reasons to sell a home that is being used as a rental property. Landlords who directly manage their homes might relocate and look for investment opportunities in the area around their new home. Alternatively, rather than looking to acquire ample cash flow through higher rent payments, a landlord may want to profit from the rental property’s equity.
It is also possible that the property in question is operating at a loss due to vacancy or a lack of sufficient rent to pay the operating expenses. Property taxes are also something that real estate investors who want to sell a rental property will have to deal with, regardless of the reason for their desire to sell.
If you find yourself wondering – should I sell my rental property?– read below to see how and why to sell an investment property.
Should I Sell My Investment Property?
You Have A Lot Of Equity
After purchasing your home at a low cost years ago with little to no renovations done, you may want to consider selling to take advantage of the large increase in value.
It is also possible that you may need to access the equity in your rental house due to a financial or medical emergency. You may also be too busy to handle the property adequately, possibly because you have new work or are moving out of state.
If you can make more money today than you planned, it’s a solid indication that you should sell a rental property on the housing market.
The Market Is Good, But Changing
There will be an additional 7.4 percent rise in real estate sale prices in 2022, and if demand continues to surpass supply, this boom might continue for many years into the future. Despite the positive projections, there’s always a risk that current homebuyers could fall out of the market as the economy takes various hits. If you are still considering selling a rental home, you might want to take advantage of the present high prices now rather than waiting to see where things go.
Property Needs Repairs
Selling an investment property with all its flaws could seem like a good idea at the time, but you may regret it once it’s on the market and not getting a whole lot of attention. That said, it’s possible to locate a buyer willing to accept the property with needed repairs if the price is right. Fixing the leaking roof, jammed window, or creaking floor before putting your house on the market might be worth the effort.
Homes that have been recently cleaned and refurbished often sell for more money than those currently vacant and need work. However, the cost of missed rent, maintenance costs, real estate agent commissions, and other repair fees may outweigh any potential profit. Consider the cost of work you have to put in versus the impression you can make on potential buyers. Small repairs and upkeep can make a big difference, but major and costly renovations should be avoided.
Will I Owe Taxes If I Sell My Rental Property?
Capital Gains Taxes
You can expect tax-free capital gains when selling a primary place of residence.
The Internal Revenue Service does not provide the same hefty capital gains tax exemptions to investors selling an investment property as it does to homeowners who are selling their main residences.
If your rental property has appreciated over time, you’ve likely earned a capital gain (the profit you get when you sell it) just like with any other dwelling. While the capital gains exclusion does not apply to you since the property has been rented rather than owned, you may still be taxed on any profit you generate over the $250,000/$500,000 level.
As long as you’ve held onto the rental property for less than a year, the earnings will be taxed at the same rate as your income. According to current tax laws, you might owe between 10% and 37% depending on your tax status.
Long-term capital gains, as opposed to short-term capital gains, are taxed at a lesser rate: 15 percent for joint filers earning between $78,750 and $488,850, or 20 percent for those earning more than $488,851.
To avoid paying capital gains taxes, you must have a taxable income of less than $80,000. It’s possible that even if you make more than that, there are ways around them.
It’s understandable to experience confusion regarding tax terms such as “depreciation recapture.” Feel free to consult a tax professional for clarity.
2 Out Of 5-Year Rule:
To avoid paying taxes on a $250,000 (single) or $500,000 (married) profit, you must have owned and resided in the residence for at least two of the past five years.
1031 Exchange
Perhaps you’re mulling over when to sell a rental property. You also want to test your luck in a neighborhood that’s on the rise, but you have a rental property that’s not doing very well and is located in an area going downhill. Maybe it’s time to sell the property.
You may be able to avoid paying the capital gains tax if you are selling a rental property using the 1031 exchange. You can then use the proceeds from the sale of your rental property to purchase another “same-kind” property that has the potential to generate higher rental income.
What precisely does it mean to be of the “same kind?” You are not allowed to utilize the 1031 exchange to purchase a home for yourself that you want to use as your primary residence. Instead, the new property must be another investment property you intend to rent out or flip. And the countdown to the deadline will begin as soon as the first property changes hands.
You have a total of 180 days to close on the property you have decided to purchase, and you have 45 days to discover and identify up to three properties you are interested in acquiring.
Because there are many other rules that you must follow with a 1031 exchange, in addition to the timing of the subsequent purchase and sale, the most critical first step is to contact a qualified intermediary whose job it is to facilitate all aspects of the kind exchange and ensure that you follow all of the required steps. In addition to the subsequent purchase and sale timing, there are many other regulations that you must observe with a 1031 exchange.
Can I Sell A Rental Property With Tenants?
Pay The Tenant To Vacate
If you’re selling a rental house and want to capitalize on your good tenant, you’ll need to honor the conditions of your lease. Keep to the contract terms, or give renters enough notice to leave. To get your renters out of your rental property during a small window of time before the lease is up, consider providing them with a small severance or discount on their rent if they agree to move out. This is less typical, however, and risky.
You typically transfer lease agreements with the sale of a property in most states, and the new owner may only make modifications once the current lease has ended. Home buyers will have to accept the lease agreement if your renter has six months remaining on their contract.
Selling To The Tenant
Suppose you have a nice renter who likes your house and is also interested in purchasing it in the future. Offer them the property. Bringing an offer to remain rather than leave is a goodwill gesture that might lead to a fast and smooth transaction for both parties.
If your renter is unable to get conventional financing, you may always provide seller financing, in which you receive monthly payments from the purchase that take into account interest, payment schedule, and default scenarios. Until the renter has a mortgage, seller financing is typical.
Selling The Property With The Active Lease
Finding a buyer willing to acquire your tenant-occupied investment property with an active lease is also possible. Renters might stay in their current residence until the end of their current contract, at which point it would be up to the new owner to decide whether or not to renew their lease or find new tenants. In a matter of days, you’ll be out of your investment and giving the keys to someone else. Both the seller and the buyer are pleased with the deal, as are the tenants.
Investors or those willing to wait until the end of a lease before moving in, renovating, or writing a new lease are the only potential buyers you have. It’s not always easy to identify these buyers, so this can be a tricky endeavor to pull off.
Waiting Until The Lease Expires
There is no early termination provision in a rental agreement if your renters are paying their rent on time and obeying the terms of their lease. Waiting for the lease to expire gives you the best chance of notifying your renters and providing them with ample notice of your intention to sell. Keeping up with your rent payments, earning money while you wait, and ending the relationship amicably are advantages of this strategy.
However, selling a rental property must be delayed. With nine months remaining on the lease, this might be lost money if the market is a seller’s market.
How To Sell Your Rental Property
There is no quick and easy way to sell investment homes, particularly poor-condition homes. There are also the finances, repairs, and tenants to consider. You can expect weeks or months to pass between the time you decide to sell and the actual transaction.
To sell an investment property, you’ll need to put in more time and effort than you would to sell your personal residence. If you’re looking to sell your house as-is quickly, a cash home buyer can make a cash offer on your rental property in as little as 14 days.