Tenants and Taxes: 5 Strategies For Selling Rental Properties

Selling a rental property can be a big decision. After all, you’re likely not only selling an investment, but also a home that tenants currently occupy. Throw in the additional complication of taxes, and it’s no wonder many landlords hesitate to put their property on the market. Nevertheless, there are some key things you can do to make the selling process go more smoothly and minimize your tax liability in the process.

Get Your Tenants On Board

Ideally, you’ll give your tenants plenty of notice before putting the property on the market. This gives them time to find alternative housing, and also makes it more likely they’ll cooperate during showings. You may even want to develop an incentive compensation plan, such as a rent reduction, for good cooperation. The last thing you want are disgruntled tenants who make showings difficult or, worse, damage the property in an attempt to get revenge. With that said, you may want to keep the decision to yourself until you’re absolutely sure you’re going to sell. You don’t want to cause unnecessary upheaval in your tenants’ lives if you ultimately decide not to sell. 

Hire A Real Estate Agent Who Understands Rental Properties

When selling a rental property, you need an agent who understands the unique challenges involved. Search for one who has extensive experience working with Colorado Springs property management companies they’ll know how to handle things like showings and disclosures in a way that minimizes disruption to your tenants. Other unique benefits of working with a property management-savvy real estate agent include an understanding of the local market for rentals and an extensive network of potential buyers – including other landlords.

Understand Capital Gains Tax

When you sell a rental property, you’ll likely be subject to capital gains tax. This is a tax on the profit you make from the sale, and it’s calculated based on the difference between your property’s selling price and your “adjusted basis.” Your basis includes the original purchase price of the property, plus the cost of any improvements you’ve made over the years.

If you’ve owned the property for more than a year, you’ll pay long-term capital gains tax rates, which are lower than the rates for short-term gains. You may also be able to take advantage of special rules, such as the 1031 exchange, which allows you to defer taxes on the sale of a property by reinvesting the proceeds into another similar investment. More tips on saving money on capital gains taxes when selling rental properties include the following:

  • Save all your receipts for any improvements or repairs you make to the property. These can be used to increase your basis and lower your capital gains tax liability.
  • Consider selling to a family member. You may be able to take advantage of the “stepped-up basis” rules, which allows the buyer to take your property’s basis (its original purchase price plus the cost of improvements) as their own. This can significantly reduce or eliminate capital gains taxes.
  • If you’re selling because you’re retired or otherwise leaving the rental business, you may be able to take advantage of the “Like-Kind Exchange” rules. These allow you to defer taxes on the sale of a rental property by reinvesting the proceeds into another similar investment, such as another rental property.

Ultimately, the tax implications of selling a rental property is highly subjective. That’s it’s always best to let a professional, like a CPA or tax attorney, give you specific advice tailored to your situation. 

Evaluate Necessary Repairs And Improvements

Often, selling a rental property means spending money beforehand, too. That’s because many buyers will be looking for properties that are in good condition and don’t require a lot of work. As such, it’s often a good idea to make any necessary repairs and improvements before putting your property on the market. This doesn’t mean you have to go overboard, though. Just focus on making any necessary repairs, such as fixing a leaky roof or repairing damaged flooring. You may also want to make cosmetic improvements, such as painting the walls or updating the kitchen, but these are typically less important to buyers. 

Review Insurance Coverage

Once you decide to sell your rental property, it’s a good idea to review your insurance coverage. That’s because your needs will likely change once the property is no longer leased to tenants. For example, you may no longer need coverage for loss of rent if the property is vacant. You might also qualify for a discount on your premium if you no longer need coverage for liability.

Preparation goes a long way when selling a rental property. This includes being transparent with your tenants, being realistic about the tax implications, and doing your research about the other financial and legal aspects of selling. All of these can make selling process as smooth and stress-free as possible.

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