Selling Your Rental Property

If you're a landlord who is considering selling your rental property, then take a moment to think about this. It would be wise to first investigate the various options that exist for structuring the sale of your property. Each option can, depending on your situation, dramatically affect the net proceeds you receive from the sale.

If the expected profit from selling your rental property will be significant, then you may want to investigate doing a 1031 exchange. This can be used to defer payment of a large capital gains tax bill. With this method, you'll basically replace your existing property with another property.

But, if your situation unfortunately warrants disposal of your rental property and "getting out of the landlord ballgame", then you can either sell the property "outright" or do an "installment sale" of the property. Each of these options for selling your rental property are discussed as follows…

Selling Your Rental Property Outright

Let's say that you've owned a three-unit rental property for several years and have realized significant appreciation during that time. With the large amount of equity sitting there burning a hole in your pocket, you'd rather sell the property, take your profit and use it to take a trip around the world and buy two new cars and a boat when you return. Life will surely be great!

But wait, there is one surprise lurking in the shadows that could jump out and ruin your plans - it's called CAPITAL GAINS TAX! Selling your rental property with an outright sale could trigger a large capital gains tax in the year of the sale.

However, if you live in the property as your "primary residence", you can avoid paying taxes on most of the capital gain when the property is sold if the following conditions are met…

• You must have owned the property for at least five years, and
• You must have lived in the property for at least two years.

You should consult your accountant or tax advisor on this "primary residence" capital gain tax treatment. This is because certain rules apply with paying tax on any depreciation deductions taken on the property after May 6, 1997.

Selling Your Rental Property Through an "Installment Sale"

The second option for selling your rental property is through an installment sale. With an installment sale, you'd essentially act as "the bank" and take back financing by lending the buyer the money to purchase your property. In this arrangement, the buyer would sign a promissory note that secures the house with a deed of trust.

The benefit of an installment sale is that capital gains taxes on the sale can be spread out over many years (the life of the loan) versus having to pay them all in the year of sale with an outright sale.

So, doing your homework and gaining knowledge beforehand can result in making better decisions that can save you substantial amounts of money. And this, as we all know, is the name of the investment property game.

Once you've determined which method of selling your rental property is best for your particular situation, a plan for selling the property should then be made.

Make a "Game Plan" for Selling Your Property

In addition, it would be beneficial at this time to explore the different methods for structuring the sale of your property and the advantages/disadvantages of each method. This is discussed below.

After this, if the market is strong and you decide that selling your rental property as a FSBO makes sense, then the following steps are needed to get your property successfully sold:

1. Hire a Real Estate Lawyer - This is like buying an "insurance policy" that will protect your interests in the transaction. Because this is probably the largest financial transaction you'll ever make, it only makes sense to have a professional skilled in real estate and contract law acting on your behalf.

2. Prepare the Property for Sale - A rental property that has been maintained and has good "curb-appeal" will certainly make it easier to attract buyers and get a higher sales price for the property.

3. Establish the Asking Price - This step is one of the most crucial elements for selling your property. If your asking price is too high, your property will sit on the market unsold. If your price is too low, the property may sell quickly but you'll leave money on the table for the buyer. The key is to find a happy medium.

4. Market the Property - This involves all the activities that you need to do that "let the world know" your investment property is for sale. Effective marketing of your property is one of the keys needed to get it sold.

5. Negotiate the Buyer's Offer - If your not selling in a strong "sellers market", then chances are good that the buyer will make an offer that is lower than your asking price or has different terms involved. Negotiating is an art as well as a skill, but there are some ground rules that apply to the process.

6. Execute the Purchase and Sales Agreement - This is where all the stipulations of the sale are put in "black and white" and, once signed, officially binds both you and the buyer. Your real estate lawyer will come in handy to review this agreement before you sign it.

7. Complete any Sales Contingencies - Buyer and seller contingencies are a normal part of any real estate sales agreement and are included to protect both parties.

8. Close the Sale - This is the final event where monies are exchanged and the title passes from the seller to the buyer.

On a final note, based on your own circumstances you should always seek professional advice from a real estate attorney or accountant regarding the sale of your property.

For more in-depth information about selling your rental property, please visit The Landlord's Library book collection. It's a terrific, one-stop source for practical, comprehensive information on the entire subject of residential landlording.

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