Selling your Rental Property

The Rental Property Business is a good business with long term profits and gains, and tax write offs, but for most people the task of being a landlord becomes all consuming and takes too much time and effort to sustain the project and keep it going forward smoothly.

It’s quite challenging to be a landlord, and almost like a full time job but there is an income you make out of it, you can choose to have a property manager to take care of the tasks but at the end of the day you have to pay the property manager from your rental income which combined with any potential ongoing repairs and other costs of owning  renal property can erode both on your margin and your patience in continuing with a rental project, If in case managing a rental project is becoming too much of a hassle you can choose sell your rental property and simply go back to rehabilitation projects.

It’s not only getting tired of managing a property that can make you consider selling sometime’s is about moving into a bigger project to have greater rental income.

But before you make the decision to sell you need to consider the legal implications for the sale of a rental property.

Tax on Capital Gain

Sale of a Rental property in profit is categorized into two types, a Short Term Profit or a Long Term profit; the Short Term Profits are generally taxed at a similar rate to normal income. The long term profits are usually taxed between 5 and 15 Percent based on your tax group, social security tax is not subject to long term or short term profit. The max long term profit rate is generally less than the usual tax rates, if you hold your property for longer than a year you will quality for the long term rate

The 1031 Exchange

If you want to plan to get out of the Rental business this probably won’t be good news but if you plan to go start a new larger project, this could possibly be the best news you heard all day.

There’s this thing called the 1031 exchange also known as a deferred exchange, it’s a tax provision that is honored by all states.

It simply states that whenever you sell one rental property you won’t have to pay taxes as long as you use the profits from the property to invest in a new property.

You must use a credible exchange facilitator or a third party to manage the sale and transaction must follow proper timelines, but essentially that you can save on tax and possibly roll over your profits into getting into a new property.

Returns on Depreciation

When you own a rental property, over time the property demises, which is a natural process, in financial terms the rate at which a property realizes its value over time is called it’s depreciation, and for rental/ residential properties that life of the property is generally set to around 27 years as defined by the IRS.

The longer your hold a property the more depreciation you can claim. Depreciation is taxed at a rate of 25% .