5 Tips For Selling An Investment Property
There are many different areas to navigate when you’re selling a rental property, including capital gains taxes and tenants. Here are five tips for selling an investment property.
1. Evaluate The Rental Property
If you’re ready to get rid of the rental property as soon as possible, it may be tempting to list it on the market immediately. But if you want to maximize the return on your investment, you should take time to evaluate the home and make any necessary repairs first.
These repairs will help the property sell for a higher price. From a tax perspective, the IRS looks at improvements to the property as adjustments to the cost basis of the home from a capital gains standpoint when selling, but basic repairs that are required are not tax deductible.
2. Honor The Lease Period
If the rental property currently has tenants living there, this complicates your decision to sell. While you can sell your property with tenants living there, most states will give them the right to remain in the property until after the lease expires. Marketing and showing the property will be more difficult if the property has tenants and may turn some buyers away. In general, it may be best to wait until their lease expires before selling.
3. Understand The Capital Gains Tax
If you sell an investment property, you’ll have to pay a capital gains tax on any profit you earn from the sale. If you’ve owned the property for less than a year, your capital gains are considered short-term and they’ll be taxed at the same rate as your income. So depending on the tax bracket you fall into, you could pay anywhere between 10% and 37% of your profit in taxes.
If you’ve owned the property for more than a year, it’s considered long-term capital gains and will be taxed at a lower rate. this will depend on how you file.
One way to defer paying the capital gains tax is with a 1031 exchange, which gives you the opportunity to reinvest the money and reduce the amount of profit you’d pay capital gains on. This involves selling your current rental property and then buying another property you plan to rent out. If you plan to take advantage of the 1031 exchange, you have 45 days to designate three potential properties and 180 days to close on one of them. When it comes to taxes, it’s recommended you speak to a financial professional or tax advisor.