If you're looking to sell your short term rental property, there are many things to consider to ensure that you sell it for a decent profit. Unlike stocks and shares, you can't be hands-off throughout the process and then move on with your day. Selling a short term rental property requires patience and an actionable strategy.
The time to sell your short term rental property will vary depending on several factors. Selling it could take a few weeks or even a few years. Likewise, the process of selling can be daunting, intimidating, and slightly overwhelming - so it is very important to be prepared.
This article will help you to better understand how to sell your rental property efficiently and profitably. You don't need to go on this journey alone, so do your research and get help, if you need it.
- Why sell your short term rental property?
- What tax will you incur when selling a rental property?
- Avoid Tax by Reinvesting
- Understanding Internal Revenue Code Section 1031
- What if you don't want to reinvest the money?
- Using Your Corporation to Lower The Capital Gains Tax
- Offset your gains with losses
- How much is capital gains tax?
- Top tips for selling your rental property
- Final Thoughts
Why sell your short term rental property?
The reason for selling varies from individual to individual, but the goals will always be the same - to make a generous profit. Noone wants to sell an investment for less or the same price as it was when it was first purchased. But, there are many instances when owners do have to take the leap. Some of the most common reasons for property owners to sell include:
- Changing their location and wanting to move their investments with them
- Cashing in on the appreciation while it's good
- Selling before the area's rental prices fall due to external factors
- The property is losing money
Whatever the reason for selling, the property owner is sure to be taxed in the process, and therefore, he or she should be aware of property tax laws in his or her state or country. Factoring in these taxes is the first step to ensure you make a profit from the sale!
What tax will you incur when selling a rental property?
The tax man is always there with his hands stretched out. That won't change, but your planning and due diligence can help limit the amount of taxation owed, simply through understanding the laws and loopholes that may affect you. When you sell your property, you will be required to pay the capital gains tax. This tax is much greater than the tax you would pay if you were selling your family home.
Capital gains tax is the amount you need to pay on the profit made from the sale of the property. This tax will increase by any depreciation you have claimed against the property.
Let's go through a quick example scenario to better exemplify this process:
Your rental property cost you $200,000, but you sold it for $250,000. That's a nice $50,000 profit. But capital gains tax will take a chunk of that $50,000 profit. Let's say you deducted $20,000 in depreciation throughout the time you owned the property. You will owe tax on the difference between the original purchase price and the current sale price minus the depreciation. E.g 250,000 - (200,000 - 20,000).
You won't be paying the capital gains tax on the $50,000 profit, rather on the $70,000 sum that takes into consideration other property factors.
Avoid Tax by Reinvesting
Real estate investors can avoid the capital gains tax if they reinvest in a similar investment (i.e., more property). You can seek the support of a lawyer or your tax advisor to set up the sale, so that the gains made can be placed within an escrow account.
This means that the funds will be safely stored away from the taxman and be readily allocated to a new property purchase. You will then have a limit of 45 days to find a new property and six months to complete the transaction. To conduct this transaction successfully, the rule of thumb is to search for your next property before you sell your existing rental property.
This process is further explained in the Internal Revenue Code Section 1031.
Understanding Internal Revenue Code Section 1031
If 1031 is the route you choose to sell your rental property, there are few rules and regulations you should be aware of in order to avoid being disqualified.
1031 code is tightly regulated by the IRS to ensure property owners are abiding by its rules. The most important guidelines which catch most property owners off guard are:
- The property owner cannot spend more than 14 days of personal time in the property during the entire ownership period.
- The property owner must have owned the property for a minimum of two years.
If the property owner fails to adhere to these rules, his or her eligibility for the 1031 capital gains tax exemption will be void, and he or she will have to pay the tax during that year’s tax cycle.
It is also imperative to remember that a primary personal residence is not eligible for 1031. To abide by the 1031 tax exemption, you must first move into a new property that you establish as your primary residence.
What if you don't want to reinvest the money?
If you don't want to reinvest and buy another property and instead want to bank your gains, there is no escape from the capital gains tax. By law, you must pay it. Otherwise, the IRS will come knocking, and you will face any legal repercussions.
Using Your Corporation to Lower The Capital Gains Tax
Incorporation is a great way to sell your property and take advantage of a corporation's favorable tax laws. For some real estate owners, incorporation makes sense. You can lessen your liability and use the corporation as a shield to protect you and your personal finances and assets.
Incorporation will lower your capital gains tax bill and allow you to make profits through your corporation's share structure.
Offset your gains with losses
This is also known as tax-loss harvesting. It is characterized by reducing your tax exposure when you sell a rental property by pairing the gains from the sale with the loss of another investment.
This method is typically used by investors on the stock market to reduce taxation when selling large chunks of shares. However, it is becoming an increasingly popular method among property owners as well.
For example, let's say you made $50,000 profit from the sale of your rental property, but you just lost $75,000 on the stock market. You would be able to effectively offset the full $50k in capital gains.
Most property owners are not able to partake in tax-loss harvesting, but it is an excellent choice for those with extensive property and investment portfolios.
How much is capital gains tax?
Below are the current law guidelines in regard to capital gains tax in the USA.
Top tips for selling your rental property
To help you further profit from the sale of your rental property, consider the following:
Sell your property via a top real estate agent
Using a real estate agent to advertise your property can be expensive, but a great agent can provide access to many buyer and investor contacts that you would not be able to facilitate on your own.
Do not try to sell your future bookings
Trying to sell your rental property with your future bookings can be an arduous process. Buyers prefer places they can rent quickly to new tenants. So, don’t try to make extra income on selling your future bookings to a buyer; instead, simply sell your property and move on.
Don't overprice your property
It can be tempting to be overconfident and overprice your home in the hope someone buys, making you that extra chunk of profit. But research shows that overpriced homes take longer to sell and end up costing the owner more during this transition period.
Use high-quality professional photos
The photos you advertise are the very first impression potential buyers have of your home. Investing in a professional photographer will allow you to sell the property quicker by helping to generate far more interest over the competition.
Work with professional realtors
You don't need to go at it alone. Get the advice and experience of professionals who know precisely how to transact property in your location. By opting to hire a professional, you will save time, money, and a lot of stress in the long run.
Whatever your reason for selling your short term rental property, make sure you do your research and due diligence first. Take advantage of the current tax breaks that help you avoid the capital gains tax, and get your property sold at a profit.
Getting support when selling your rental property is truly recommended. Here at The Short Term Shop, we can help you with the whole process, from explaining the tax rules as they apply to your unique situation to advertising and selling your property. Simply call us at 800.898.1498 or email us at firstname.lastname@example.org to speak to one of our professional team members and learn more about our services.
We look forward to assisting you!