Over 36.6% of Americans rent their home, a number that hasn’t been seen since the record high of 37% in 1965.
Owning rental property is more than a way to put a roof over your head; it’s also an effective form of passive income.
Managing rental properties can become a burden, and your investment can also increase your taxes. There may be situations where selling is the best option.
Read on for 3 reasons you may need to quickly sell a rental property.
One of the first things anyone who attempts to invest in real estate will look at is market factors such as the price of similar houses. What they may be forgetting is that lifestyle factors have a major influence as well.
Rental properties acquired during a marriage are always considered marital property. All income and tax burdens need to be equitably shared by both sides in the event of a divorce.
Selling a rental property and splitting the profit is the fastest, easiest option if neither of you wants it anymore.
You may also need to quickly sell a rental property if you get divorced and can’t handle the associated costs alone. If your spouse no longer wants to manage it with you but agrees to sell it, the time may be right.
Both sides should have the rental property appraised to ensure they get a fair value. After that, work to complete the selling process by the time your divorce is finalized.
Check here for more on dividing property after a divorce.
2. Rental Property Tax
Owning a rental property can produce so much extra income that it could send you into another tax bracket. You’ll need to keep this in mind to avoid a nasty surprise at tax time.
Watch out for capital gains on rental property. It comes at a rate of 15%.
There are ways to fight against this tax increase. Try using the “like-kind” loophole in Section 1031 of the tax code.
Like-kind exchanges allow you to sell a rental property and purchase a similar one. You won’t have to pay any extra taxes until the exchange is made.
You can swap any income-generating rental unit for another. Try buying your dream business to replace an old rental apartment unit.
If you want to use the like-kind exchange loophole, be sure to do it quickly. You only have 45 days from the property sale to identify your replacement properties and must formally close on them in 180 days.
3. Rental Property Depreciation
Real estate depreciation begins the moment you use the property as a rental. It occurs at a rate of approximately 3.636% per year for 27.5 years.
Depreciation is important at tax time but also helps you decide when to sell a rental property.
Depreciation and Taxes
Calculating depreciation lets you deduct the costs of buying and improving a rental property. It lowers your taxable income based on costs such as insurance, property taxes, and repairs and maintenance.
You can deduct depreciation costs of any property you own or use as an income-producing property for at least a year. All you have to do is subtract the value of the land.
You can continue to claim depreciation while the property’s idle to help you recoup costs as you prepare it for the next tenant. The tax break lasts until you’ve deducted its entire cost or it’s retired from service.
How to Calculate Depreciation
There are several different formulas you can use to determine the depreciation of your rental property over time. This can help you see how well it will hold its value and determine when is the best time to sell.
Start by finding the basis of the property. This number indicates how much you paid to purchase the rental property.
The purchase price isn’t the only thing that you should consider when calculating your basis. It can also include:
- Legal and recording fees
- Transfer taxes
- Title insurance
- Seller debt such as back taxes
Other costs can’t be factored into the basis of the property. These include:
- Fire insurance premiums
- Rent for tenancy of the property before closing
- Mortgage insurance premiums
- Credit report costs
- Appraisal fees
GPS is the most common system for calculating depreciation. The rental property depreciates 3.636% every year. If it’s in service for less than a year, use a smaller percentage.
You have to use the ADS system if the property:
- Is used as a business at least 50% of the time
- Has a tax-exempt use
- Is financed by tax-exempt bonds
- Is used primarily for farming
- Has a recovery period of 27.5 years
Whichever formula you use, depreciation is an essential calculation when deciding when to sell a rental property.
Depreciation and Sales
Once you know the value of your property, you can determine how much it’s depreciated. This is an essential calculation for two reasons.
First, depreciation determines how much you can write off at tax time. You’ll save a great deal of money when factoring in value changes.
Depreciation can also help you determine how the value of your rental property will change over time. This helps you determine the best time to sell because it lets you know when your property is at its most valuable.
You must sell a rental property before its value depreciates too much. Be sure to do it before it drops below your initial investment.
You may also want to sell a rental property when the depreciation tax write-off becomes insignificant. You won’t be getting enough back at tax time to justify keeping the property.
More Tips on When to Sell a Rental Property
A record-high number of Americans currently live in rental homes. They provide a home and a way to increase your income.
Deciding when to sell a rental property involves examining factors such as its profitability and the health of the market. There are some situations where you may need to expedite the process and make a quick decision.
Lifestyle factors such as divorce may require you to sell. Rental properties also increase your tax burden and should be sold before they depreciate too much.
Read the rest of our content for more tips on how to invest in real estate.