Sometimes, the best way to improve your rental property portfolio is to realign your investment strategy altogether. And those plans might involve selling off one or more of your existing rental properties. Whether this is the scenario you currently find yourself in or maybe you’re just exploring ways to lighten your load, there are selling insights to know and mistakes to avoid. Here are a few of those tips to consider before you officially list your rental property for sale.
1. Plan for Capital Gains Taxes
Selling your primary residence means collecting proceeds tax-free. But when you’re selling rental property, you’re earning investment income that the IRS wants in on, of course. If you’ve owned your real estate investment for a while, it’s likely increased value over time. Upon the sale and subsequent earnings, you might face short or long-term capital gains taxes that could charge anywhere from 10% to 37% of your proceeds.
Capital Gains Tax Deferment
You might want to explore the benefits of the 1031 exchange, whereby you can defer capital gains taxes associated with the sale of your rental property. In these scenarios, you might be able to sell one piece of investment property and buy a different property with more income potential. There are stipulations, like the “like-kind” requirement meaning the newly purchased property must align with the property you’ve sold. And there are timelines to adhere to for selling and buying to be eligible.
Taking up Residence First
If you’re concerned about capital gains taxes on the earnings from the sale of your rental, maybe you can move into the space yourself first. Homelight reminds investors that if you can live in the rental as a primary residence for at least two years, it then reverts the property back to your home and is no longer an investment in the eyes of the IRS. At this point, you can sell the property as an individual listing personal property, negating capital gains taxes.
2. Communicating to Your Tenants
Having long-term tenants already in place is a great selling point for your rental property listing, especially if it’s a turnkey, multi-family unit. But if you’re not diligent and transparent about communicating with them, you might lose them. Give renters ample notice if your intention is to vacate them prior to listing. Or, if they’re allowed to remain in the space, communicate your plans to sell and what might occur with a lease transfer to the new owners. Honor those leases and keep residents in the loop about your efforts.
3. Invest in Necessary Repairs Before Listing
It’s one thing to list your own residence as-is and avoid any upgrades or repairs. But when you’re looking to unload a rental property, you’ll want to secure the best offers possible. And the best way to impress other real estate investors is by taking care of some of the repairs and heavy lifting for them. Call in your trusted contractor to replace the leaky faucets, put a fresh coat of paint on heavily marked walls, and fix the loose railing. A clean, updated space will attract higher offers from potential investors. And if you’re not opting for the 1031 exchange, any repairs you make prior to listing will be considered tax-deductible, defined as upkeep expenses.
If selling your rental property makes sense right now, consider these three things first. And remember, you don’t have to tackle listing, buying, or portfolio management alone. Contact us at PMI JCM Realty Group for all the best insights for investment from an asset management perspective!
At PMI JCM Realty Group, we’re always looking to share the latest in rental property investment tips as well as emerging trends in the Tampa real estate market. If you’re exploring how to drastically improve your experience and bottom line, sign up for our free webinar. Here you can discover relevant strategies for investment improvement success. It’s the must-watch webinar, offering real-world advice on How to Streamline Your Rental Portfolio for Maximum Growth! Area property investors in Tampa and beyond, just like you, will find something useful to take away.
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