09 Nov The Key to the Sale of Rental Property
Thinking about selling a rental property? Owning a rental property can be a great option for several reasons: passive income, appreciation in value, and depreciation in tax opportunities, to mention a few. But there comes a time when – for whatever your reason – it’s time to sell your rental property.
3 things to consider when selling a rental property
1. Why are you selling a rental property?
- Was this property purchased for-profit, does it have some sentimental value, or is it your past home that you are now renting?
- Are you at an age where you can tap your 401(k) or IRA or begin collecting Social Security and Medicare?
- Are you losing money on your property? Do you have high maintenance costs?
- Do you have needy, troubled or bad tenants?
2. When is the best time to sell a rental property?
This can be tricky depending on the status of the real estate market at the time you are ready to sell. There are definitely a couple of questions to ask yourself before selling your rental property:
Evaluate your rental: are maintenance costs eating into your profit? Is it at a substantial loss, enough that you are hardly profiting from the rent, or just breaking even? Are you actually losing money on the property?
- Is the depreciation tax value on the property no longer applicable?
- Did the tenant vacate the property and the improvements needed to outweigh the gains of re-leasing?
3. What is the best route to selling a rental property?
There are many ways you can go about selling your rental property. One of your first questions needs to be whether you are interested in purchasing an additional rental property or exiting the rental market.
If you are tired of owning a rental property, it is likely the property needs work. Your best bet is to sell to an investor, who has the ability to take on the workload of efficiently leasing and managing the property.
If you simply want to sell one property and purchase another, the best route is most likely the 1031 Exchange. The Internal Revenue Code Section 1031 is designed to allow real estate investors to avoid paying gain taxes by immediately re-investing them into other rental properties.
This essentially means that if you’re ready to sell then you can roll your investments over into another rental property and avoid taxes. If you plan on continuing your rental property management, then this is your best bet.
If you’re looking for other ways to avoid gain taxes when you sell your rental property, check out this Forbes article.