You may have any number of reasons for wanting to sell an investment property.
Investors often sell to take advantage of a hot market or offload a property they’re losing money on. Other times, they’ve inherited a property they don’t want to manage — or they’re moving away from one.
Whatever the reason, selling a rental property is not unlike selling a primary residence, albeit with key differences. Below are some steps to consider before you sell your investment.
If you currently have tenants, padding your sale timeline will give yourself plenty of runway. Communication, empathy and patience with your renters go a long way to ensure a smooth and efficient sales process.
Remind your tenants that selling the property doesn’t necessarily mean they’ll need to move. Your tenants are entitled to live in the residence for the length of their lease, so if you sell before the lease expires, the new owner will need to honor the lease terms. If you end up with a buyer who intends to continue using the property for rental income, they might be thrilled their new purchase already comes with stable tenants.
Be courteous and give your renters plenty of notice before showings. You may find them more cooperative and accommodating with incentives like a small rent discount while the home is on the market, a biweekly cleaning service to keep the property in top condition or even overnight hotel stays for weekend showings.
As with any other property sale, it’s important to have a plan in place before you hit the market.
– Hire a proven real estate agent. Some sellers balk at the idea of paying a 6% commission. However, professional real estate agents with solid track records can often negotiate a higher sales price than sellers who sell on their own.
An experienced agent can also offer good advice if you’re selling under less than ideal circumstances: for example, you inherited the property, you’re selling because of a job loss or move or you’re selling after owning the property for less than a year.
- – Price correctly. Do a comparative market analysis to see what similar homes in your area are currently selling for and price accordingly. Buyers will be looking at the same market comparables, and overpriced homes tend to take longer to sell — or even end up selling for a less than optimal market price.
- – Ready your property. Take care of any deferred maintenance before listing to reduce the number of items that could end up on an inspector’s list. Be sure to keep records and receipts. If budget allows, ask your agent to recommend which small upgrades you could make now for a bigger payoff later.
Capital gains taxes are typically higher when selling an investment property than when selling personal property, though the length of ownership or depreciation you may have claimed against the property may affect how much you’ll pay.
You might consider a few different strategies to offset capital gains taxes. For example, the Internal Revenue Code Section 1031 allows investors to roll over capital gains if they reinvest in a like-kind property, which is a great option if you intend to invest in another property. Flipped houses do not qualify for 1031 exchanges however — something to keep in mind if your investment strategy includes renovation.
Incorporating your investment business is another option to lessen your liabilities, as tax laws can favor corporations when it comes to capital gains taxes. Remember, a qualified tax professional can help you navigate the process to make sure you’re in compliance and making the best use of your investment options.