A Guide to Selling a Rental Property

In contrast to stocks and shares, real estate investments can't be liquidated quickly or within a click of a mouse. It may take several weeks from a decision to sell until the sale occurs. If you aren't prepared, selling your house can be overwhelming. However, selling investment properties often demands extra work and attention.

Why Sell?

The following are some of the most frequent considerations when selling a rental property:

• Landlords may relocate and decide to invest in something else in the new location, specifically if they manage the property directly.

• May run into issues with tenancy arrangements.

• Sometimes people desire to maximize their profit from the property.

• Property has a negative cash flow.

How to Achieve a Smooth Sale

Here are some ways to follow to attain a smooth sale when selling a property:

Do Not be Caught Off Guard by Capital Gains Taxes

Any profits from the sale of a home used as a principal residence are typically taxation-free. Usually, you won't have to pay taxes on earnings up to $250,000 (single) or $500,000 (married).

However, there is a significant catch: you must have owned the home for at least two years and resided in it for at least two of the preceding five years to qualify. The IRS does not provide the same capital gains tax benefits to real estate investors; other regulations apply if you sell real estate.

Short-term capital gains, which include those from selling a rental premise held for less than a year, are taxed at the same rate as regular income. It puts your potential tax liability between 10% and 37% as of this writing under current law.

Long-term capital gains are taxed at a reduced rate, 15% for joint filers with taxable income between $83,350 and $517,200 and 20% for those with more. The capital gains tax is waived if your income is less than $83,350. But there may be ways to circumvent them even if your income exceeds that.

Use 1031 to Avoid Paying Taxes of Gains Made

When a rental property isn't bringing in enough money and the surrounding area is deteriorating, it may be time to sell and move on to greener pastures. The 1031 exchange allows you to defer paying capital gains tax when you sell an investment property and use the profits to buy a new "like-kind" estate.

What does "like-kind" mean? The 1031 exchange can't be used to purchase a home for personal use; the replacement property must be for rental or resale purposes. Furthermore, the clock begins to run as soon as you sell the first home: You've got 45 days to narrow your search to three potential properties and another 180 to complete the deal.

Honor Your Lease or Grant Tenants Ample Time to Leave

If you decide to sell a rental property that is currently occupied, you should negotiate with the renters and provide an incentive for them to leave. However, if they insist on remaining there, or if you have a great tenant and want to highlight that fact when trying to find a new one, you'll have to abide by the lease.

In most jurisdictions, the lease is automatically transferred with the transaction, and the new owner must wait until the lease expires to make any modifications. If your tenants are paying on a month-to-month basis, you can give them the notice to move. Discover the laws that govern your state of residence.

Use a Good Renter as a Selling Point

Some investors would rather have an active tenant in a property than an empty one. If you're selling with a renter, remember that you're advertising the property to investors alone. Thus include details in the listing that buyers would care about. Some examples of these are:

How long has the tenant been a resident?

How much is the rent each month?

Has rent always been paid on time?

Do tenants pay any utilities?

Are any licenses, deposits, or other permissions accompanying the lease?

What is the last date of the lease?

The easiest way to ensure that your renters are willing to cooperate with you as you sell investment properties is to provide them with some incentive. It could be rent reductions or gift cards to maintain the property in good condition and be flexible during showings.

Consider Whether the Property Requires any Repair

It can be tempting to want to unload a rental property as quickly as possible by putting it on the market with no preparation. Even if you find an investor willing to pay more for a home that needs maintenance, fixing minor issues such as the dripping faucet or a creaky door may be worth your time. A home in good condition will fetch a greater selling price than an older rental property in need of a lot of maintenance.

Consider updating an empty home to contemporary rental standards with new paint, blinds, lighting fixtures, and more. This reassures purchasers that they won't have to undertake any repairs before finding a tenant. Some repairs you can skip include cosmetic flaws, minor electrical issues, a driveway, removable items, and some old appliances. Read more about what not to fix when selling a home. Get the advice of an experienced tax expert if you have questions.

Don't Rely on Rent to Increase the Value

Refrain from assuming that the presence of a good, well-paying tenant will increase the value of your single-family home, even if that tenant makes the property more desirable to investors. Single-family rental properties are valued in the same way as other single-family residences.

But if your rental estate contains five or more units in the multi-family housing category, your value will depend on the rental income.

Hence, increasing rent won't impact the property's value, but it may increase your property's appeal to investors who appreciate stable rental revenue. In that case, a tenant earning more income will also reflect on the property's value.

Hire the Ideal Realtor

If you're trying to sell a rental property, it could be tempting to save money by not using a real estate agent. 

Finding an agent with experience in investment properties is a good idea to ensure a smooth sale. They will know or understand local rent trends, the tax involved, ROI expectations, and your home's after-repair value (AVR). They can also tell you when the time is right to sell.

A BidMyListing our first-of-its-kind marketplace connects home sellers with top real estate agents who bid for the opportunity to represent their home sales. Each bid includes a cash offer, listing term, commission rate, and information about the agent. By putting all the negotiating cards on the table – and having the agent invest in the home sale upfront – we empower home sellers to make more informed decisions.

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