So, you’ve decided that the investor’s life isn’t for you and that you should sell your rental property. Whatever your reasons are, selling a real estate investment can be a bit complicated, which is why we strongly suggest partnering with a property management agent. However, if you’d rather go through the experience alone, in this post, you will find a few useful tips on lowering your taxes when selling your South Florida rental house.
How do you know if it’s the ideal time to sell?
You shouldn’t decide to sell your house on a whim. It’s tempting to sell your house because other people are doing it, but it is the right thing to do? Does it align with your goals? Even if you’ve invested in a short-term buy-and-hold, that doesn’t mean you have to sell it once five years have passed. When making your decision, you should take into account the real estate investment market’s behavior.
Here are the signs that it’s the right time to sell your rental:
#1 Your property’s value has increased
If your goal is to get your property to a certain value, and that has finally happened, you’ll likely make money if you were to put it on the market now. Remember, as a rule of thumb, your rental home should be worth more than what you bought it for.
#2 You’re losing money
If you aren’t seeing a positive cash flow even if you’ve filled all of your rental units, it’s time to reevaluate if the landlord’s life is worth it. Perhaps you weren’t expecting the cost of property management expenses to rise, or the rental rate has dropped exponentially. Whatever the reason, selling your rental home might be the best option.
#3 The demand for homes has risen
Are more people in need of a home than a rental? Examine the real estate market to check if the demand for homes has risen to the point where it exceeds the supply. You could also ask your property management company to conduct a real estate market analysis – particularly to determine the price-to-rent ratio.
#4 The local market is rapidly changing
Perhaps you purchased the property when employment was on the rise. Unfortunately, over time, the market took a downturn, and now its dynamics have slowed down. The employment rate has dropped, and there’ve been multiple unfavorable developments in your area – ones that cause your investment’s value to plummet.
What should you do if you want to sell your rental property?
In most states, investors can sell their investments at any time, even if it’s still occupied. Be sure to consult your property management firm if you’re allowed to do this with your South Florida real estate investment, or if there are other laws that govern its sale.
#1 Inform your tenants
Even if you’re “leaving” your tenants, you shouldn’t end your relationship on a bad note. Inform your tenants about your plans and be sure that they understand why you’re selling your property. Remember, not all new owners will want to use the property as a rental – in short, your tenants will have to move. By delivering the news to your tenants, you’ll be able to give them advance notice so they don’t have to be displaced at moment’s notice.
#2 Give your tenants options
In case the new owner has confirmed that they won’t be using the property as a rental, you need to be accommodating toward your tenants. Your tenants won’t be happy that they’ll have to leave, so you’ll have to provide them with multiple options to appease them. They can either move out now or wait until the property has been purchased by the new owner. Either way, you should consider providing incentives such as covering their moving costs or waiving the termination fee.
Do you need to pay taxes when selling your property?
Tax can be extremely complicated, but we’ll try to explain it as simply as possible. In general, when you sell a rental property, you’ll have to pay tax on any gains that you have.
To find out the gain or loss, just take the difference between the property’s sales price (how much you sold it for) and the adjusted basis. The basis refers to the value of the investment property, while the adjusted basis reflects the deductions due to depreciation.
Reductions in Basis
According to the Internal Revenue Service (IRS), the depreciation on a rental property is spread out over 27.5 years. Every year, you need to deduct the depreciation from the property’s initial basis, as well as any items that may have “returned” your cost. This includes insurance payments that you received due to a covered peril.
Increases in Basis
Increase the basis of your house according to the cost of additions (e.g. property improvements), repairs (e.g. due to fire, flood, etc.), and legal costs incurred in perfecting the property’s title. Basically, increases in basis are factors that boost the investment’s value.
Let’s say you purchased a property for $200,000. Throughout your ownership, the property’s depreciation was $40,000, and you spent $20,000 on property upgrades. The depreciation would lower the basis ($200,000) to $160,000, but the improvement would increase it to $180,000. If you sold the property for $300,000, your taxable gain would be $120,000 ($300,000 – $180,000).
Can you avoid paying taxes when selling your investment property?
You can’t avoid paying taxes, but you can defer your taxes by purchasing a replacement property within 180 days of transferring ownership of the “old” property. Consult an investment advisor to help you understand IRS Section 1030.
At Luxury Property Care, our experts are prepared to help you calculate your taxes when you decide to sell your rental property. Apart from that, we’ll also help you list your property on sites that are exclusive to property managers, real estate agents, and more. With us by your side, you’ll be able to increase your profits and make sure that you take advantage of all your options in lowering your tax expenses.