ULTIMATE GUIDE TO SELLING RENTAL PROPERTY – INCLUDING TAX TIPS
If you’ve invested in real estate and have listed your property (or properties) as a rental, there may come a time when it makes sense to sell it.
This typically happens when you determine that the money earned through selling the property is likely to be greater than if you continue renting it out.
While selling a rental property isn’t always a simple process, there are ways to make the sale go as smoothly as possible. You can follow these steps on your own, but we highly recommend hiring a professional to help you get the best return possible.
Why Sell Your Rental Property?
Selling a rental house or apartment is a big decision. And there are many reasons why you may decide that selling your property is the right option.
Perhaps you self-manage your property and are moving out of the area. You won’t be available to manage your rental, so you’d rather sell and buy something closer to your new residence.
Or, perhaps the value of your home has appreciated and you’d rather reap the benefits rather than renting it out.
Another reason why you might decide to sell is that your property is losing money (due to vacancy, etc.), and you’d rather get out while you are still ahead.
No matter your reason, you’ll want to have all of the information you need to list, market, and sell your rental property effectively.
How to Sell a Rental Property
Selling rental property can be broken down into a few main steps. These include: vacating your rental, making repairs, staging your property, marketing it, and covering your tax situation.
Follow our guide below to make selling your rental property a breeze.
Vacate the Property
If you have a tenant (or tenants) living on your property already, you’ll need to send a notice to the tenant that they’ll be due to vacate at some point.
If you already have a deadline in mind, make them aware of this, and include some cushion so they can get their belongings out in time for you to clean the unit. You’ll need enough time to conduct repairs, stage the property, and show it before you can find a buyer.
Sending an official notice to the tenant to vacate due to sale is the best way to make sure they know when to move out by. Get this is writing so both you and your tenant are on the same page.
Before you sell your rental property, you’ll want it to be in tip-top shape. Making repairs to the rental property before putting up for sale allows potential buyers to see how amazing your property is in its best condition.
Some repairs you should consider making on your rental property include:
- Cleaning or replacing old/worn-out carpet
- Replacing or refinishing damaged flooring
- Replacing loose doorknobs and hinges
- Repairing broken tile in the kitchen or bathrooms
- Replacing outdated appliances
- Replacing worn-out electrical boxes and faceplates
- Touching up the walls with new paint
- Pressure-washing the outside of the building
- Trimming trees and bushes
- Replacing old or broken light fixtures
These are just some of the many repairs you could make on your rental property. Consider what a potential buyer may be looking for in a new home. Making these repairs may seem tedious (or expensive), but they are likely to increase the value of your property.
Stage Your Property
Staging a rental property is essentially helping potential buyers visualize what their life would be like living in your home. A cold, empty space isn’t very inviting. With staging, you may make it appear more “home-y” and welcoming.
Home staging for rental properties is relatively easy. Here are some tips:
- Get rid of clutter, garbage, and debris.
- Keep the rooms looking bright and airy, with light colors and open blinds.
- Spend the most time staging the important rooms, like the living room and master bedroom.
- Remove excess furniture and rent new furniture that fits your desired aesthetic.
- “Float” the furniture by keeping tables, chairs, and couches away from the walls to create space.
- Add final touches, like fresh flowers, vases, folded towels, and throw pillows.
The goal is to make your rental home appear livable, but not cluttered with stuff. This helps potential buyers visualize themselves in your home, making it more likely that they’ll make an offer.
Market Your Property and Choose an Agent
Marketing a rental property is typically the most involved part of the process. You’ll need a marketing strategy in order to reach potential buyers and encourage people to make offers.
The best way to do this is to hire a professional real estate agent. An agent will be experienced in marketing properties across a variety of platforms.
You can find a real estate agent by asking for referrals from family or friends, by searching for real estate agents online, or through checking out your local newspapers.
Then, you’ll want to research potential candidates and conduct interviews to find the best fit for you.
Once you’ve found an agent, they’re likely to market your listing across multiple platforms, such as:
- CENTURY 21 Real Estate
The platforms you and your agent choose will depend on the types of buyers you want to reach. Through these platforms, your agent will schedule showings with potential buyers until one or a few put in offers.
Since you’re selling your own investment property, you may also be considering buying a new one, you should learn about the 1031 tax-deferred exchange.
This exchange allows you to sell your property and buy a similar property while deferring capital gains tax. This is based on Section 1031 of the US Internal Revenue Code, which states that you can postpone paying taxes on your capital gains if you sell a property and then reinvest that money into a like-kind property (of equal or greater value) within a certain period of time.
As a real estate investor, you may want to utilize a 1031 exchange if:
- You want to diversify your assets
- You found a new property that has better return potential
- You’re looking for a managed property instead of managing it yourself
- You’re consolidating multiple properties into one, or you’re dividing one into multiple assets
- You want to reset your “depreciation clock”
Knowing the depreciation of your property is essential to understanding the benefits of utilizing a 1031 exchange.
Depreciation is the percentage of the cost of your property that you get to write off on your tax return, due to the expected effects of natural wear and tear.
So, what happens to depreciation when you sell a rental property?
When you sell your property, your capital gains are determined based on your property’s net-adjusted value. If your property happens to sell for more than its depreciated value, you may have to include those earnings in your taxable income.
However, if you utilize a 1031 exchange, you may be able to defer – possibly indefinitely – an increase in taxable income. The amount of the depreciation recaptured increases over time, so this will be a factor when it comes to calculating the value of a 1031 exchange.
Tax Tips for Selling a Rental Property
Obviously being aware of the tax on selling a rental property is important so you’re not on the hook for paying taxes on a huge portion of your earnings. Knowing this information before you sell will help you take the smartest route and end up with more money in your bank account.
Calculating taxes when selling a rental property isn’t always straight forward. You’ll need to consider the value of your building, the value of the land, and depreciation. If you don’t have these numbers on-hand – or aren’t sure how to calculate what your home is worth – then it’s best to hire a real estate investing professional.
Here are some tax tips when it comes to selling rental property:
- Take advantage of a 1031 Exchange
- Offset your gains with losses using tax-loss harvesting
- Convert your rental property into your primary residence to exclude as much as $500,000 in capital gains from your taxes
When you sell your rental, you want to make the highest profit possible without worrying about paying a ton of money in taxes. If you are new to selling, or simply don’t consider yourself to be an accounting pro, consider hiring a real estate investing agent first to help you get your taxes in check.