How To Sell A Rental Property
Many people buy rental properties with the idea of making money from them, but they are not sure how to sell a rental property and avoid taxes. This can be a big problem because if you have enough rentals, it could mean that you owe some serious money in back taxes. There is no need to worry, though, because we’re going to teach you all about how to sell a rental property and avoid taxes!
Find a buyer
When it’s time to sell your rental, you have a few decisions to make. First, you need to decide whether or not you will sell the property yourself, which can be expensive and time-consuming, or if you would rather hire a real estate agent or work with a local investor or professional home buying company. If you have never sold anything before then, it’s probably best that you let an experienced professional handle it with their expertise in pricing and negotiating.
If you currently have tenants in your rental, selling to an investor will likely be your best option. Especially if you have tenants that are giving you trouble (not paying rent, destroying the property, etc.)
Get your property ready to sell
Suppose you want to get the highest price for your rental. You will want to make sure there aren’t any major issues that could bring the price down. For example, you will want to make sure your carpets are clean and that there aren’t any stains on the walls or ceiling.
You can also contact a professional painter, handyman, landscaper, etc., to get quotes for jobs you might need to be done before selling to get an idea of what it would cost them to do the job.
Ending your tenant’s lease is one sure way to make selling your property easier. However, sometimes this can result in a lengthy eviction battle and tons of time invested into something you want to be done with. 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.
Become familiar with taxes and how they apply to you as a seller of a rental property
Now that you prepared your property to sell, it’s time to learn more about the tax implications of selling a rental property.
The first order of business is assessing what type of profit – if any – you made on the sale. If you’re selling it at an unrealized loss, then that’s great! You don’t have anything out-of-pocket expenses or income from the transaction, and no taxes are due whatsoever. However, most people didn’t buy their properties to lose money on them (or did they?), which means there must be some gain involved in these transactions.
The most common taxes paid out for a rental sale are capital gains.
If you sell an investment property for more than it is worth, you have a capital gain. There are two different types of capital gains — short-term and long-term — depending on how much time has elapsed since the purchase date. They are treated differently at tax time.
If you sell an investment property under one year, the gains will be taxed as ordinary income. This is similar to how we are taxed for our wages and salaries in the US; short-term capital gains incur a 10% tax bracket all the way up to 37%.
Most other investment properties held for at least a year receive lower long-term capital gains tax rates, while profits on flipped houses may be taxed as short-term gains.
If you own a rental property for at least one year, it’s considered a long-term gain. These gains are taxed at a lower rate: 0%, 15%, or 20%, depending on your income and filing status.
How to calculate capital gains
To calculate the capital gains or loss, you need first to find the “cost basis” of the property and calculate the “net proceeds” you made from the sale.
The cost basis is the amount you paid for the property (including some closing costs, appraisal fees, and legal fees) plus the costs of any major improvements you made to the property.
To find the net proceeds, you will need to subtract the costs from the sale price. For example, let’s say you sold your rental for $200,000 but paid $15,000 in commissions and $5,000 in other costs. Your net proceeds would be $180,000.
Now that we know the cost basis and the net proceeds, you plug them into this formula to calculate the capital gains.
“cost basis” – “net proceeds” = capital gains
How to reduce or avoid capital gain taxes
One of the most popular ways to reduce taxes is to reinvest the profit in another property or rental within 180 days of the sale. Clearing the profit from a rental property can be done without paying any taxes using a section of the tax code called 1031 or Starker. Sell your old investment property, buy another like-kind one, and use an intermediary to facilitate the process.
You have 45 days to identify up to three like-kind exchange properties to qualify for this tax code. You will have 180 days to close on a new property from the close date of your rental property.
Taxes are complicated, and laws are always changing. That is why we suggest you consult with a certified public accountant before making any decisions.
Offset gains with losses
Another way to reduce your tax liability when you sell investment property is by pairing the gains from the sale with the losses of your other investments. You can do this strategy in a process called “tax-loss harvesting.”
If you sold your rental property for a profit and made no other gains from investment sources in the same tax year, the IRS will take their share of your profits. However, you can use losses to reduce that amount. For example, say you decided to exit an underwater stock position and purchased a condo development instead- and profited $25k from that sale– but then lost $20k on stocks during the same tax year; in this case, only $5K would be taxable capital gain.
One caveat to remember: The tax code requires that short-term and long-term losses get used first to offset gains of the same type. But if your short-term losses exceed your short-term gains, you can apply the excess short-term losses to any long-term gains.
A simplified way to sell your rental
If you don’t want to deal with your rental property anymore and want to sell it as-is without doing any work or putting any time or money into it, selling to a professional home buyer/investor may be perfect for you.
When you sell directly to an investor, you cut out all the middlemen and all the confusing, complicated steps typically involved in selling a rental property. As a result, investors can make quick and swift decisions when buying property. They simplify the selling process and can even purchase properties that have tenants in it still. (Even if they need to be evicted, they can do that for you)
When you work with an investor, they will know the area well and be upfront with how much they can offer for the property (meaning no back and forth negotiating). As a result, investors can close quickly and often have cash on hand, which means they don’t need to wait for financing.
Partner with Connect Home Buyers
Want to get an honest, fair market price for your inherited property and walk away without doing any work? When we say “without doing any work,” we mean it! No repairs, no cleaning, no realtors, no lawyers, no appraisers, no open houses, no waits, no commissions, no fees. It’s just seller (you) and buyer (us). We cut out all the middlemen and all the stress.
Connect Home Buyers has been helping landlords buy and sell real estate for years. We can provide you with a quick all-cash transaction and help you simplify the entire process.
It’s 100% percent free. What do you have to lose? If you are not satisfied with our services and offer, you can always decline and move on.
The worst-case scenario is you will get a free consultation and have a backup offer just in case a buyer’s loan falls through last minute or something unexpected happens that you weren’t prepared for. Lifes happens to all of us, and we are here to make it easier.
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