You buy rental properties to invest in and then eventually sell and earn capital gains. It can be one of the smartest investments you make in your lifetime. Before you sell, though, there are certain considerations you must make to ensure you handle the transaction right.
Options to Sell a Rental Property
If you own a rental property, chances are you have tenants in it. If you decide to sell while you have tenants, you have a big decision to make. How will you sell it? Here are your most common options:
Wait for the Lease to Expire
If you have the time, waiting for the lease to expire is the easiest way to sell a rental home. Once the tenants leave, you can fix up the home and sell it as a vacant home. This increases your target audience.
Most buyers looking for a primary residence won’t consider a home with tenants in it. Buyers worry the home won’t be as well cared for as it would if the owners lived in the home. This option works best if you only have a couple of months left on the lease. You can use that time to prepare for the sale, and when the lease ends, you start the process.
It’s a good idea to let your tenants know ahead of time that you won’t renew the lease. While some tenants may move on after lease expiration, some may expect to renew the lease.
Sell the Property to Your Tenant
If your tenant loves the property, consider asking him/her to buy it. You never know if they’d be interested.
In the best-case scenario, the renter wants to buy the home, has a down payment, and qualifies for standard financing. You can conduct the sale as you would with any other buyer, selling the house in a decent amount of time.
If the renter doesn’t qualify for financing and/or doesn’t have a large down payment, you can offer seller financing. This keeps you involved in the investment, but you’re on your way out. You can provide financing for a few years (you choose the terms). The renter (now buyer) pays you principal plus interest during the term. At the end of the term, the buyer refinances the debt with a loan from a bank and pays you off, releasing you from the investment.
Pay Your Tenant to Leave
If your lease has a long time left on it, yet you want to sell now, consider paying your tenant to leave. Many tenants are open to this, especially if you’re willing to negotiate. You can offer any amount or to cover a certain type of expenses, but here are the most common:
- Cover the difference between the renter’s rent at the new place and the rent he/she paid you for the remainder of your lease term
- Cover the renter’s moving costs
- Pay a fixed amount that you both agree on
Renters don’t have to agree to a buyout, but with the right steps, you may get them to agree so you can sell the home faster.
Sell the Home With Tenants in Place
This option has become more popular today. You can sell the property with tenants in it. You sell the home and the lease to the buyer.
This does not affect your renters – they get to stay in the home, and the lease remains unchanged. The only thing that changes is who collects their rent and who they call if/when something is wrong with the property.
Roofstock Marketplace is a platform that brings together investors, both buyers, and sellers, who want to buy or sell property with tenants. It’s the easiest way to sell your investment property with tenants in it. You can sell your home faster than if you had to wait for tenants to vacate, and for the price you want.
Taxes and Selling Rental Property
Selling your rental property may put a decent profit in your pocket. That’s the idea of investing in real estate, right?
But, Uncle Sam will have his hand out wanting his share of your profits as it’s income you earned. Before you sell your rental property, understand how it may affect your taxes.
Know Your Capital Gains
Capital gains are what the IRS taxes you on when selling a rental property. Capital gains are the difference between the cost basis (purchase price plus any acquisition costs) and the sale price.
First, determine how long you’ve owned the home. If it’s less than one year, you have short-term capital gains and will pay the most taxes. Short-term capital gains are taxed at your regular tax rate and may bump you up until the next tax bracket for higher tax rates.
If you’ve owned the home longer than one year, you’ll pay long-term capital gains rates, which are much lower and range between 0% – 20%.
Fortunately, there are ways to reduce your tax liabilities on an investment property.
Offset It With a Loss
If you can time the sale of your investment property with the sale of an asset at a loss, the loss decreases your capital gains. It doesn’t have to be a loss in real estate – it can be a loss in any asset, including stocks, bonds or cryptocurrency.
The key is to sell the asset at a loss in the same year you sell the rental property. The loss offsets the capital gains, decreasing your total tax liability.
Consider a Like-Kind Exchange
If you’re selling a rental property because you found another real estate property to invest in, you may be eligible for a like-kind exchange.
You must follow strict rules to qualify, but it can be a great way to defer the taxes you’ll owe on your capital gains.
Here are the basics of qualifying for a like-kind exchange:
- You must identify a property to purchase within 45 days and close on it in 180 days.
- You must work with an intermediary who oversees the like-kind exchange to ensure it’s legit.
- You must put your intentions to purchase a property with your proceeds in writing.
- You must buy real estate with the proceeds and not any other asset.
- The property you buy with the proceeds must be another investment property – not a primary residence.
- You may owe capital gains on your purchase.
Use Roofstock Marketplace to Sell Your Rental Property
No matter the reason you’re selling rental property, Roofstock Marketplace can help you get the most money for it and make the process as easy as possible.
Roofstock is a marketplace for rental properties. It brings together buyers and sellers, all with a similar goal – to buy or sell investment properties.
You don’t need to handle hundreds of buyers walking through your home. The entire process is done online with the support of Roofstock professionals who make the process easy for you.
Benefits of Using Roofstock
Working with Roofstock puts you in direct contact with buyers looking for investment properties.
Here are some other benefits of using Roofstock Marketplace to sell your property:
- Large audience: With Roofstock, you target the right audience from the start.
- Get worldwide exposure: Anyone can use Roofstock and see the properties for sale.
- Continuous cash flow: You keep earning cash flow until you close on the property. You don’t have to pay tenants to leave or deal with a vacancy.
- Roofstock does the work: A lot of due diligence goes into selling a rental property. Roofstock makes it easier for you to sell the property and easier for buyers to determine if it’s a good purchase.
- Low cost: Roofstock charges just 3% commission.
- Roofstock does the talking: You conduct all business through the Roofstock platform, and Roofstock does the talking to your buyers.
The Bottom Line
Selling a rental property can be profitable and easy when you use the proper steps. Roofstock Marketplace makes it easy for anyone to sell their rental property with tenants in it.
Look at the big picture before selling your rental home. Know everything that’s at stake and who will be affected by the sale, and you’ll have the greatest outcome selling your investment home.