Investing in rental property is one of the most lucrative forms of real estate investing. The right rental property can provide you with steady returns on your investment, give you a place to retire in the future, and help keep your income stable.
However, there’s a good chance you’ll want to sell at least a few of your rental properties during your investing career. So, here are some basic things to consider when selling rental property.
When Is The Right Time to Sell?
When selling rental property, timing can be everything. So, it’s important to determine a good time to sell.
It could be a good time to sell if your rental property is losing money for reasons out of your control, you are relocating and self-managing your rental property, you need to diversify your investments, or you are preparing to retire and would like to raise cash by liquidating some of your assets.
But if your rental property is profitably generating cash flow, and you are comfortable generating an investment income for years to come, it’s probably not a good time to sell. What else would you do with your money, if you weren’t investing in real estate?
For many investors, real estate is one of the best ways of generating an income throughout their lifetime, and leave an inheritance for future generations.
Upon the occasions you want to sell rental property, of course you want to do so when the market is strong. But, here are a few more things to keep in mind.
Tax Issues When Selling Rental Property
When selling rental property, all of your profits are subject to either capital gains tax or depreciation recapture tax.
It’s important to accurately track your cost basis for the investment property, so you do not pay more tax than required. The cost basis includes the initial cost of what you paid for the property, including your closing costs. And, the cost of improvements made to the property that increased its value or extended its useful life.
It’s also important to keep up with depreciation, because you’ll have to pay a depreciation recapture tax if you sell the property for more than the depreciated value. (Note: you must pay the depreciation recapture tax, even if you did not claim the depreciation during the time you owned the property.)
Most importantly, in the event you are taking the profits from the sale to purchase another investment property, possibly upgrading your investment portfolio, you can defer the taxes into the future by using a 1031 Exchange.
Note: always consult your accountant about tax issues related to selling your investment property.
Allow Time To Sell Rental Property
Depending on the type of rental property you are selling, you could find a buyer quickly, or it could take considerable time to find a qualified buyer.
If you are selling a single-family home that is an occupied rental, it could sell very quickly, especially if it is in a desirable location. But if you are selling a large multi-family complex, you could have the property on the market for several months. Therefore, it’s important to purchase rental properties that fit within your overall real estate investment plan, including your exit strategy.
Graystone Investment Group
Graystone Investment Group is an experienced Investment Group wholesaling properties in the Greater Tampa Bay market.
Unlike other wholesaling groups, we find properties that we resell to investors at discount prices, while also connecting them with private financing. We also coordinate with rehab and management companies we’ve worked with for years, at no extra charge.