How To Sell An Investment Property For A Profit

Do you want to sell an investment property for a profit? I can assure you, there is both a right way and a wrong way to go about doing so. To tip the scales in your favor, however, you may want to listen to what the rest of this article has to say.

Selling An Investment Property The Right Way

Let’s be honest, there is more than one way to sell an investment property. You may already know a system that has worked for you in the past. If not, and you are otherwise looking for the most important steps of selling an investment property, look no further. Below you will find the most important steps to help you sell an investment property:

• Hire An Agent Or Realtor: I maintain real estate agents and Realtors — and I mean truly great ones — are integral to the selling process. While enlisting their services will cost homeowners approximately six percent of the sales price, they are often well worth the cost of admission. In fact, there’s no reason a good representative can’t simultaneously save sellers more than their fees cost and mitigate the headaches that have become synonymous with selling an investment property.

• Listen To The Help: In the event you decide to work with a Realtor or real estate agent, be sure to heed their advice. There is no reason to think they wouldn’t know more about the local real estate market than you do. That said, they will know the best way to proceed. Listen to what they tell you to do to the home, how to list it, and anything else they suggest. Provided you vetted your Realtors accordingly, you should hang on every word they say.

• Make The Necessary Changes: It is entirely possible to sell an investment property as-is, but there may be times when making small upgrades are more beneficial. If you want to sell your home in a timely and profitable manner, for example, try making simple yet beneficial upgrades. You would be surprised at how upgrading the amenities in your house slightly above your competition can help sell a home. At the very least, buyers will be drawn to the better upgrades.

• Price The Home Perfectly: I can assure you that pricing a home to sell is a lot more complicated than placing an arbitrary value on a home; trust me, it’s probably not worth what you think it is. Pricing a home has more to do with comparables than how you perceive it. If for nothing else, it’s the comparables buyers will be using to justify the price, so you should be, too. Use nearby comparables to determine a selling price, and consider listing your home for slightly less. That way, you’ll create demand in a market that is lacking options. you see, by asking for slightly less than nearby comparables, you will fabricate competition in your property; competition that can easily lead to a bidding war in a market as competitive as today’s.

• Market, Market, Market: Marketing is the process of generating exposure. The more people that are aware you are selling an investment property, the better. Therefore, it’s in your best interest to spread the word. Provided you hired a Realtor, they will do everything they can to ensure more eyes on your property, but don’t stop there. Do what you can to get the word out. Talk within your network, post signs around the neighborhood, buy ads in newspapers, and host open houses — anything to generate more exposure.

• Stage The Living Space: Staging isn’t necessary, but it may as well be. While you don’t have to stage a home to sell, data suggests a properly staged home will sell for more and in less time.

• Entertain & Negotiate: Listen to offers, but don’t necessarily jump on the first one you hear unless it’s exactly what you were looking for. In today’s competitive landscape, there is bound to be competition, and sellers can very easily use interest in their property to their advantage. Moreover, be open to negotiations.

• Close The Deal: In the event everything lines up perfectly, close the deal. Sell the home and meet the criteria to allow escrow to disperse the funds and papers necessary to exchange goods.

It is worth pointing out that a good real estate agent will facilitate a smoother sales process. If you do decide to hire a Realtor or an agent, they will see to it that selling an investment property goes well, or at least as well as the situation calls for. Again, they will cost you money, but I am convinced they are well worth it.

[ Learn how to analyze deals like a pro! Attend a FREE real estate class in your area to learn how to identify the most rewarding investment deals. ]

Selling A Rental Property Pros And Cons

Selling a rental property has become synonymous with several pros and cons. Let’s take a look at some of the biggest repercussions that will come out of your own attempt to sell an investment property — good and bad.

Pros Of Selling A Rental Property

While it may sound counterintuitive to many investors, there are actually pros to selling a rental property, but I digress. Pros and cons can only be determined by one’s personal endgame. What may be a pro for one investor could very easily be a con for another; it really depends on what each individual hopes to accomplish. That said, one of the pros of selling a rental property is the opportunity to make an immediate, significant profit. It is true, rental properties are a great way to build wealth well into retirement, but they aren’t exactly fast at accumulating said wealth. As a result, selling a rental property could be a great move for an investor that needs to remain liquid and earn a lot of cash in a relatively short period of time. In other words, rental property owners could forge the opportunity for long-term wealth building for immediate gains if they choose to sell their rental property. If that’s not enough of an incentive, however, said investors could easily reinvest the money they make from the sale of their rental property into a subsequent, better rental property.

Cons Of Selling A Rental Property

I am convinced the cons of selling a rental property outweigh the pros, but again, I digress. Not unlike the pros I already went over, the cons of selling a rental property are entirely dependent on what you want out of a particular investment. As I alluded to before, it could be in your best interest to sell a rental property if you want cash fast. However, in selling a rental property for immediate returns, you are effectively ridding yourself of any ability to generate wealth over the long-haul. In selling a rental property, you are eliminating the potential of passive income and even having someone pay down your mortgage through monthly rent payments. While you will certainly benefit from the large sum of money immediately after the sale, the benefits of the investment will end there, not the least of which includes rental property depreciation, which I will get into below.

Rental Property Depreciation: What Is It And Why Should You Care?

Rental property depreciation, otherwise known as depreciation losses, are none other than one of the single greatest tex benefits of owning rental properties.

The I.R.S. defines depreciation losses as “allowances for exhaustion, wear and tear (including obsolescence) of property.” According to their website, “You begin to depreciate your rental property when you place it in service. You can recover some or all of your original acquisition cost and the cost of improvements by using Form 4562, Depreciation and Amortization, (to report depreciation) beginning in the year your rental property is first placed in service, and beginning in any year you make improvements or add furnishings.”

Rental property owners are, therefore, allowed to write off a portion of their home’s initial cost for 27.5 years (the amount of time the I.R.S. has determined to be the deductible life of a single-family home). Quite simply rental property depreciation is an amazing opportunity for rental property owners to reduce their tax obligations for a set period of time.

What Is The Capital Gains Tax?

It its simplest form, the capital gains tax is just that: a tax levied on profit from selling an investment property or home. “That’s the case whether you bought it as an investment, such as stocks or property, or for personal use, such as a car or a big-screen TV,” according to TurboTax. In other words, “If you sell something for more than your “basis” in the item, then the difference is a capital gain, and you’ll need to report that gain on your taxes.”

There are, however, exemptions homeowners should be aware of. If for nothing else, real estate will represent most people’s largest asset, and — depending on the market — the easiest opportunity to realize capital gain on a sale. Fortunately, the powers that be (the I.R.S.) have allowed homeowners to exclude some or all of said gains if they meet three particular criteria:

• The homeowner owned the property for at least two of the five years leading up to the sale.

• The homeowner claimed the property as their primary residence for at least two of the five years leading up to the sale.

• The homeowner never excluded the gain from another home sale in the two-year period before the sale.

Single homeowners that meet these conditions may be able to exclude up to $250,000 of their gain, and twice that if they are married and filing jointly.

Selling Investment Property Tax Calculator

Calculating the tax implications for an impending investment property sale can be a tricky endeavor, and should only be left to a trained professional. If for nothing else, there are too many moving parts for the average homeowner to understand what’s at stake. However, if you simply want a ballpark figure of what to expect, here’s a property tax calculator you may want to check out.

How To Avoid Tax Hits When Selling Investment Properties

Rental properties have become synonymous with today’s greatest retirement vehicles. Few (if any) investment opportunities are capable of rewarding investors with the same generous ROI potential and passive nature of a cash-flowing rental property. It is worth noting, however, that while owning a rental property can be great for business, selling one can be costly. Any attempt to sell a rental property for a profit will result in capital gains. The amount taxed will depend on several factors, not the least of which include the length of homeownership, filing status and profits realized at the time of the sale. Consequently, capital gains taxes can cost those selling investment properties quite a lot of money.

Fortunately, all is not lost. While taxes are unavoidable, there are a few ways rental property owners may lessen the burden inflicted by selling investment properties. Let’s take a look at some of the most common ways rental property owners may mitigate tax losses when they sell investment properties.

Tax-Loss Harvesting

The first thing landlords will want to do when it comes time to sell investment properties is to offset any gains with realized losses. Commonly used by stock market investors trying to reduce the amount they owe from stock gains, rental property owners may attempt to reduce their exposure to taxes by offsetting any capital gains with any losses they may have realized over the course of the year. To be perfectly clear, the IRS allows investors to pair gains and losses together to shelter income. Therefore, any losses realized on the investment may be subtracted from the capital gains levied on the investor at the time of a sale.

IRS Section 1031

Section 1031 of the IRS Tax Code is intended to help anyone who isn’t planning on cashing out on their investment, at least for now. In fact, this particular part of the tax code will allow those selling investment properties to put off paying capital gains taxes if they use the proceeds from the sale to buy a “like-kind” property shortly after. Otherwise known as a “like-kind” exchange, Section 1031 of the tax code rewards investors who intend to reinvest the proceeds from the sale into a new real estate asset within a predetermined amount of time. It is worth noting, however, that while sellers can defer paying capital gains taxes with a 1031 exchange as many times as they like, they will be held responsible for paying capital gains when they eventually end up taking a profit from a sale (without reinvesting the proceeds). In other words, exchanging one property for another similar one could help investors put off paying capital gains in the current year.

Convert Investment Property Into Primary Residence

In the event landlords are able to convert the rental property into their primary residence before they sell, they may be in line to save a lot of money come tax time. In fact, turning a rental property into a primary residence may coincide with even greater savings come tax time. Consequently, it’s more beneficial from a tax perspective to sell a home you live in than one you are merely renting out to tenants. To qualify, however, owners must be able to prove they have owned the home for at least five years, and lived in it for at least two of those five years. The amount owners will be able to save at tax time depends on how long they lived in the home.

Summary

Selling investment properties (especially those which are cash flowing) is never an easy decision to make. Not only is it hard to give up an income-generating asset, but there’s always the chance the owner will be hit with significant capital gains tax. Fortunately, there are ways to mitigate the amount Uncle Sam intends to take at the end of the year. With a little preparation and solid accounting, it is entirely possible to shelter some of your money over the upcoming tax season.

Key Takeaways

• Selling an investment property can mean many different things for many different investors.
• To tip the scale of selling an investment property in your favor, follow a proven system.
• Decide for yourself whether the pros outweigh the cons of selling an investment property.