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How To Sell A Rental Property – Ultimate Guide Plus Tax Tips

How to sell a rental property ultimate guide plus tax tips

Table of Contents

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There are a huge number of benefits to owning a rental property, but sometimes it’s the best decision to let it go. Even when there are great tenants and the property is making money. Even if neither of these is the case, you can still learn how to sell a rental property.

Is it time to sell your rental property?

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Many people buy rental properties with the idea of making money from them, but then they end up in a situation that’s not ideal. Rental property owners can get a lot out of selling to real estate investors and letting go of the rental income.

The real estate market is always going up. Though an investment property might have been a great choice initially, rental income doesn’t always keep up with the market. Most real estate investors eventually choose to sell rental property eventually.

A new owner can deal with the hassle of figuring out cash flow and dealing with renters not paying rent. Reverting back to a personal residence model often makes the most financial sense. Even if there’s passive income from the rental property, that doesn’t make it the perfect option for everyone. 

Renter concerns

With a rental home, there’s a lease period with the renter. Rental property owners don’t have to wait for the lease expire period to arrive before selling a rental home.

The current lease agreement doesn’t mean it’s impossible to sell a rental. The new owner will benefit from the case flow. When someone is ready to sell a rental, they can work with the new owner to transfer the lease on the rental home.

Selling a rental with a tenant

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A tenant-occupied property is still able to collect rent through the sale period. This is true even if they are on a month-to-month lease. A good tenant is hard to find! Potential buyers are willing to work with an existing tenant.

The security deposit could be part of the sales agreement. It’s a good idea to get real estate advice about things like the security deposit and the tax rate.

One property that’s always attractive to potential investors is one with a security deposit and a good tenant. Passive income from this kind of setup is always a welcome asset. 

Rental property and taxes

Avoiding taxes when selling a rental property is a central concern. The sale proceeds from a home sale can mean a big tax hit. To avoid capital gains taxes, it’s important for property investors to make smart decisions.

Real estate investing is sometimes like the stock market. In the case of capital gains taxes, the tax rate is the same. It involves financial planning to defer taxes and ensure that you’re not in the top tax bracket. 

Capital gains taxes are the difference in the original purchase price and the current fair market value. That profit is taxable income. No one wants to owe capital gains tax. The tax rules are the same for everyone, but by selling to a cash buyer for a lower cost, landlords can get a lower tax bill. They’ll save on closing costs, too.

To avoid capital gains tax, talk to a tax professional about your options. A tax professional can tell you whether the purchase price of your inherited rental property will be low enough to avoid a higher tax bracket.

Finding a buyer

When it’s time to sell your rental, there are lots of decisions to make.

The first decision is whether to sell the property as a FSBO (for sale by owner), doing the legwork on your own. Even with a FSBO, you’ll need a real estate attorney to sell a rental. It can be expensive and it can waste a lot of time to do it alone. All of that eats into cash flow and causes a lot of headaches.

Real estate agents

Real estate agents are another option. Working with a real estate agent always means paying higher closing costs and fees along the way. Again, this takes a bite out of the cash flow and can reduce the profit from real estate assets.

For a smooth rental property sale, consider a local investor or professional home buying company. For landlords who have never sold anything before, it’s probably best to let an experienced professional handle it the process. Their expertise in pricing and negotiating can make it all easier.

Remember, the priority is to get the property sold. You also want to pay less in property taxes along the way. A real estate investor can help facilitate all of that. Seller financing is also an option in many cases.   

Current tenants

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Landlords who have tenants in the rental currently are a great prospect for a real estate investor. Investment property is always a hot choice on the real estate market, more than a primary residence.

To sell a rental property, have available a history of the rental income.  Current tenants who are good tenants will make it easier to sell a rental property.

If the current tenants are less than ideal, ie not paying rent, breaking the lease rules, destroying the property, etc., then it might be best to try to get them out of the house before attempting to sell the rental property.

Getting property ready to sell

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If you want to get the highest price for a rental, the first thing is always the condition of the property. Make sure there aren’t any major issues with the house that could lower the price. For example, get the carpets cleaned professionally and make sure there aren’t any broken appliances or stains on the ceiling or walls.

It’s never a bad idea to work with a professional landscaper, painter, or even a general contractor in the lead up to selling a home of any kind. A house in great condition will make seller financing more of an opportunity.

Anyone who’s been a landlord for any amount of time will be familiar with these kinds of resources. The same kinds of things that need to be done with a home after an old tenant leaves and before a new tenant goes into the property can be done before the house goes up for sale.

Do you need to end the lease?

In many cases, ending the lease of a tenant is a sure fire way to make the selling process go much faster and easier.

Unfortunately, this can sometimes end up in a long eviction battle that drains cash flow and eats up resources. Landlords who don’t want to go through evicting tenants will have an easier time working with local investors than just about any other kind of seller. A  home can be sold as is, tenant included, if it’s to a real estate investor.

If you don’t want to deal with evicting your tenants and want to sell it as-is without doing anything to it, work with a local investor to see if they can help take it off your hands for a fair price.

Seller financing with a real estate investor can make it even easier. This way, there’s not waiting around for bank financing and the whole process can go a whole lot faster.

Taxes on sellers

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Anyone who is selling a rental property will definitely want to become familiar with taxes and how they apply to the seller of a rental property. The tax implications of selling a rental property are significant. .

The first order of business is assessing what type of profit – if any – you might make on the sale of a rental property. If the owner sells it at an unrealized loss, then there are no taxes to be paid. That’s great! There won’t be any out-of-pocket expenses or income from the transaction. In this situation, you won’t have to pay tax at all on the rental property.

Most real estate transactions involve some kind of profit. That means there must be some gain involved, meaning these transactions are subject to capital gains tax fo some kind. The most common taxes paid on rental property sales are capital gains.

What is capital gains tax?

When someone sells a property of any kind for more than it is worth, they have a capital gain. The capital is the money and the gain is the increase in money.

There are two different types of capital gains. These are short-term and long-term. They depend on how much time has elapsed since the date that the house was purchased. Each one is treated uniquely at tax time by the IRS.

Short term and long term gains

calculating capital gains taxes

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When an owner sells an investment property after owning it for less than one year, the gains are taxed as ordinary income. This is the same way that people are taxed for wages and salaries in the United States. Short-term capital gains are subject to a tax of 10% all the way up to 37%.

Pretty much all other investment properties held for at least a year get a lower rate. This is because they’re subject to long-term capital gains tax rates. Profits on flipped houses are more like to be taxed as short-term gains at the higher rate.

Someone who owns a property for at least a year is subject to a long-term gain tax. These profits are taxed at a lower rate that ranges from 0%, 15%, to 20%. The specific rate depends on your income and filing status.

Calculating capital gains

Calculating the capital gains or loss starts with finding the “cost basis” of the property. From there, it’s time to the “net proceeds” you made from the sale of the investment property.

The cost basis is the amount paid for the property. This includes including some closing costs, as well as appraisal fees and legal fees. It also included the cost of any major improvements made to the property.

Net proceeds

Next, find net proceeds. Subtract the costs from the sale price of the home. You could look at this example to understand more clearly. Say you sold your rental for $200,000. You paid $15,000 in commissions , then another $5,000 in other costs (fees, etc.). The net proceeds on the property are $180,000.

Once we know the cost basis and the net proceeds, then there’s a formula to find out the capital gains. It’s just the net proceeds minus the cost basis. It’s that simple!

Before finding out how to defer capital gains taxes, first you’ve got to know how much you owe.

Reduce or avoid capital gain taxes

Capital gains can take a big hit on the profits from an investment property. Unlike a primary residence, investments are there for the purpose of making the owner money. There are a few ways you can help reduce or avoid these taxes.

Use a 1031 exchange or Starker

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A highly popular way to do this is to reinvest the profit in another property or rental within 180 days of the sale. This way, you’ll clear the profit from a rental property without paying any taxes. It’s a section of the tax code called 1031, Starker.

This is a great way to avoid hefty capital gains taxes on a property that is not your primary residence. To do this, sell one investment property, buy another one that’s of the same kind, and use an intermediary to facilitate the process.

The code gives you 45 days to identify up to three like-kind exchange properties. Once the transaction qualifies, there are 180 days to close on a new property from the close date of your rental property.

Taxes are highly complicated. What’s more, the laws are always changing. This is a major reason why you should consult with a certified public accountant before making any final decisions about what to do with a rental property to avoid taxes.

Offseting gains with losses

There’s another tried and true way to reduce your tax liability. When you sell an investment property, you can pair the gains from the sale with the losses of your other investments. This strategy is called called “tax-loss harvesting.”

Capital gains examples

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Here’s an example. If you sell your rental property for a profit but make no other gains from investment sources during the year, the IRS will take a chunk of the profits. However, it’s possible to use losses to reduce that amount.

Here’s an example. You decide to exit an underwater stock position and purchase a condo development instead. In the condo deal, you profit $25k. During the same tax year, you lose $20k on stocks. This leaves you only being liable for $5K of taxable capital gain.

It’s important to remember here that the IRS code requires that short-term and long-term losses get used first to offset gains of the same type. If your short-term losses exceed your short-term gains, you can apply the excess short-term losses to any long-term gains.

Simplify selling your rental

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Though the tax code is complicated, selling your rental property doesn’t have to be.

When you decide it’s time to sell your rental property, you can sell it as-is without doing any work or putting any time or money into it. Working with a professional home buyer is a great option. An investor can do the heavy lifting in the process and can get your rental off your hands.

Getting rid of the middlemen

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When you sell directly to an investor, you cut out all the middlemen. All of those confusing, complicated steps that are involved in selling a rental property are out of the picture. Investors can make quick and swift decisions when buying property.

A real estate investor knows exactly what they’re looking for and how to find it. The selling process can be simple,  even on properties that have tenants. In the case that those tenants need to be evicted, the investor can do that for you.

An investor will know the area well, especially when it comes to rentals. They’ll be upfront with how much they can offer for the property. There’s no back and forth of negotiation. There are no tactics and no extended timelines. As a result, investors can close quickly. They often have cash on hand, which means they don’t need to wait for financing.

Partnering with an investor

If you need an honest, fair market price for a rental property, an investor can make that happen without much work. No repairs, no cleaning, no realtors, no lawyers, no appraisers, no open houses, no waits, no commissions, no fees.

With an investor, it’s just the seller and the buyer. The tenants are taken care of through the transaction, and everyone can get what they need out of the home sale. Investors have generally been working wit landlords to buy and sell real estate for years. They provide you with a quick, all-cash transaction and help you simplify the entire process. 

All investors know that time is money. Getting the transaction done quickly and without hassle is what it’s all about.

Brett Riggins

Brett Riggins

Founder of Connect Home Buyers Brett Riggins started his real estate journey after graduating from Western Michigan University in Construction Engineering. After completing his first few residential flips, him and his wife Arin started Connect Home Buyers LLC, and today, they help homeowners sell their property quick and hassle-free.

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