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There are a huge number of benefits to owning a rental property, but sometimes it’s the best decision to let it go. Even when there are great tenants and the property is making money. Even if neither of these is the case, you can still learn how to sell a rental property.

Is it time to sell your rental property?

Many people buy rental properties with the idea of making money from them, but then they end up in a situation that’s not ideal. Rental property owners can get a lot out of selling to real estate investors and letting go of the rental income.

The real estate market is always going up. Though an investment property might have been a great choice initially, rental income doesn’t always keep up with the market. Most real estate investors eventually choose to sell rental property eventually.

A new owner can deal with the hassle of figuring out cash flow and dealing with renters not paying rent. Reverting back to a personal residence model often makes the most financial sense. Even if there’s passive income from the rental property, that doesn’t make it the perfect option for everyone.

Selling a rental with a tenant

A tenant-occupied property is still able to collect rent through the sale period. This is true even if they are on a month-to-month lease. A good tenant is hard to find! Potential buyers are willing to work with an existing tenant.

The security deposit could be part of the sales agreement. It’s a good idea to get real estate advice about things like the security deposit and the tax rate.

One property that’s always attractive to potential investors is one with a security deposit and a good tenant. Passive income from this kind of setup is always a welcome asset.

Rental property and taxes

Avoiding taxes when selling a rental property is a central concern. The sale proceeds from a home sale can mean a big tax hit. To avoid capital gains taxes, it’s important for property investors to make smart decisions.

Real estate investing is sometimes like the stock market. In the case of capital gains taxes, the tax rate is the same. It involves financial planning to defer taxes and ensure that you’re not in the top tax bracket.

Capital gains taxes are the difference in the original purchase price and the current fair market value. That profit is taxable income. No one wants to owe capital gains tax. The tax rules are the same for everyone, but by selling to a cash buyer for a lower cost, landlords can get a lower tax bill. They’ll save on closing costs, too.

To avoid capital gains tax, talk to a tax professional about your options. A tax professional can tell you whether the purchase price of your inherited rental property will be low enough to avoid a higher tax bracket.

Do you need to end the lease?

In many cases, ending the lease of a tenant is a sure fire way to make the selling process go much faster and easier.

Unfortunately, this can sometimes end up in a long eviction battle that drains cash flow and eats up resources. Landlords who don’t want to go through evicting tenants will have an easier time working with local investors than just about any other kind of seller. A home can be sold as is, tenant included, if it’s to a real estate investor.

If you don’t want to deal with evicting your tenants and want to sell it as-is without doing anything to it, work with a local investor to see if they can help take it off your hands for a fair price.

Seller financing with a real estate investor can make it even easier. This way, there’s not waiting around for bank financing and the whole process can go a whole lot faster.

Short term and long term gains

When an owner sells an investment property after owning it for less than one year, the gains are taxed as ordinary income. This is the same way that people are taxed for wages and salaries in the United States. Short-term capital gains are subject to a tax of 10% all the way up to 37%.

Pretty much all other investment properties held for at least a year get a lower rate. This is because they’re subject to long-term capital gains tax rates. Profits on flipped houses are more like to be taxed as short-term gains at the higher rate.

Someone who owns a property for at least a year is subject to a long-term gain tax. These profits are taxed at a lower rate that ranges from 0%, 15%, to 20%. The specific rate depends on your income and filing status.

Calculating capital gains

Calculating the capital gains or loss starts with finding the “cost basis” of the property. From there, it’s time to the “net proceeds” you made from the sale of the investment property.

The cost basis is the amount paid for the property. This includes including some closing costs, as well as appraisal fees and legal fees. It also included the cost of any major improvements made to the property.

Net proceeds

Next, find net proceeds. Subtract the costs from the sale price of the home. You could look at this example to understand more clearly. Say you sold your rental for $200,000. You paid $15,000 in commissions , then another $5,000 in other costs (fees, etc.). The net proceeds on the property are $180,000.

Once we know the cost basis and the net proceeds, then there’s a formula to find out the capital gains. It’s just the net proceeds minus the cost basis. It’s that simple!

Before finding out how to defer capital gains taxes, first you’ve got to know how much you owe.

Reduce or avoid capital gain taxes

Capital gains can take a big hit on the profits from an investment property. Unlike a primary residence, investments are there for the purpose of making the owner money. There are a few ways you can help reduce or avoid these taxes.

Partnering with an investor

If you need an honest, fair market price for a rental property, an investor can make that happen without much work. No repairs, no cleaning, no realtors, no lawyers, no appraisers, no open houses, no waits, no commissions, no fees.

With an investor, it’s just the seller and the buyer. The tenants are taken care of through the transaction, and everyone can get what they need out of the home sale. Investors have generally been working wit landlords to buy and sell real estate for years. They provide you with a quick, all-cash transaction and help you simplify the entire process.

All investors know that time is money. Getting the transaction done quickly and without hassle is what it’s all about.

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