Top Five Questions Landlords ask to Sell a Rental Property
Buy low Sell High!!
Many investors purchased homes between 2007 and 2011. With the real estate market hitting all-time highs and the lack of inventory, many investors are selling and waiting for the next down turn in the market. Some investors are positioning their gains through a 1031 exchange and taking their money to markets outside of Colorado and purchasing vacation homes and or homes for their kids in college. There are 5 questions that I have been consistently asked the last couple of months.
Do I let the tenant stay in the property while listing the home for sale?
This scenario concludes that the lease is up and the tenant is on a month to month with a 30 day contract. All landlords like a tenant that pays on time. The hardest decision may be to terminate a contract and list the house while vacant in order to achieve top dollar. The house vacant will allow you to fix up, repair and clean the property. The repairs may include new paint and carpet. Potential buyers are then given the opportunity to view the house without the limitations that a renter may place on showing times and or the renter sabotaging the showing.
If you choose to list the home with the tenant, even the best tenant can be a detriment. Tenants have nothing to gain and are only inconvenienced in the process. Additionally, the tenant has to find a new home. Very few tenants will keep a home show ready during the listing period and even during the inspection period while under contract; thereby,
Can I sell the house if there is a current lease?
This scenario requires that you sell the house and the tenant. The buyer not only has to like the house, but the tenant as well. This is by far the most difficult sell/situation. You may be limiting your buyers to only investors and or a buyer that can wait for a lease to expire and will become a landlord immediately. Any deferred maintenance is usually put off until the tenant lease has been terminated.
Client Testimonial- 'I sold multiple rental properties in the Spring. The property with the tenant sold 5% lower than our list price due to her smoking in the unit prior to a showing. I also did a 1031 Exchange and purchased a condo on the beach in Florida.' - Kelly in Aurora Colorado
Should I clean, paint and carpet the house before listing?
Very rarely do I get a seller that does not want top dollar for a property and just wants the home sold. Do you want top dollar? If so, the property has to be show ready when you list the home. At a minimum, you should have the property professionally cleaned to include carpets, kitchen, baths, baseboards and appliances. You should have the mechanicals serviced and certified. An inspector, hired by the buyer, is looking for flaws in the home and the appearance is typically the first flag that the house has or has not been taken care of.
Tenants will never take care of your home the way you would if you were living in the home. The life on flooring in a rental is five years. There are inexpensive carpets that can be used in exchange for a worn carpet. In some cases, the return is well over 100% and may take a property that is in below average condition to average condition. A worn out carpet can affect a sale by as much as 3-6%.
This also applies to paint. Walls and ceilings that have cigarette smoke can reduce a sale by as much as 5-10%. This is an example of spending $2,000 to get $5,000- 8,000 back.
Will I have to pay taxes on the net gain/profit?
You will be taxed on the net gain of the sale of the rental property through capital gains taxes and will be taxed through your recaptured depreciation. The net gain is typically calculated at 20% for short term and between 5 and 15 percent for long term depending upon your tax bracket. The depreciation is the income tax deduction that allows you to recover the cost of said property. Depreciation is subject to recapture when you sell the property. The taxes will take a bite out of your profits. Keep in mind; you can deduct selling expenses and commissions paid on the sale.
Always consult with a professional (tax accountant) to determine the true tax liability of your sale so that it is calculated correctly. How can I avoid paying these taxes? Read below.
What is a 1031 Exchange?
Avoid paying taxes through a 1031 Exchange!! Simply put - you would sell a property and purchase a new property or replacement property of equal or greater value. You can defer taxes by holding the next property until you sell that property in the future.
This process is managed by an exchange company that will hold your proceeds from the sale. The exchange company will have control of the proceeds received from the sale of the old property and cannot be held by you, an attorney, CPA, etc. There is a processing fee to start the process. The sale dates and exchange period are critical in this process. You have 45 days from the date of closing to identify a list of properties that you will replace with a new property. From the 45 day list, you have 180 days to close on one or more of the properties. Title of the new property has to mirror the original deed.
The only other option would be to move back into the home for two years. Again, please consult with a tax accountant or attorney to see if this is an option in that I am not.
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