Looking into Selling My Rental Property Upon Retirement & Wondering How to Avoid Capital Gains Taxes?

by | Mar 23, 2018


Pro’s to Selling My Rental Property?

  • Unlock equity. One of the main reasons folks will choose to unload their rental property and sell it off is because they’ve got enough equity to pocket a lot of money from the sale. The sale proceeds could be used to beef up your retirement cushion/account, or maybe be used to purchase a new home somewhere else where taxes are lower.
  • No longer deal with landlord responsibilities. Let’s be honest, being a landlord is no easy feat for anyone. While you may have more time on your hands now that you’re retired to deal with tenant issues, that doesn’t mean that you want to. If you have been a landlord for years, the calls late at night about a plumbing issue, the complaint about a loud neighbor, or efforts to keep the property rented long-term can be a real headache.
  • Freedom. Most folks are looking to sell their primary residences at retirement in order to downsize, but that doesn’t always happen. Maybe your goal is to sell your rental and primary residence so you can have complete flexibility and freedom to travel for a while or buy your dream home to nest in. Your story can vary immensely, but ultimately, you see a benefit in profiting off of the sale and using the proceeds now. If you’re to retire from your career AND other responsibilities that rob your time, then it makes sense why you’d want to get rid of your rental property.

What Are the Cons of Selling?:

  • Eliminating an income stream. If you’re retiring, then the income generated from your rental property to supplement your retirement portfolio overall can be really beneficial. For some, losing out on this additional income once their income is reduced is a saving grace. Consider the income you will be missing out on each month by letting go of your rental and weigh the pros and cons.
  • Prices are always going up. Some of us will always think “the grass is always greener.” And when it comes to real estate that is often the case. By holding onto your property, you will likely make much more money or profit on its sale the longer you wait because prices are always going up in San Diego. Prices for rents have been on a consistent steady rise as well. So, consider how much you could sell in the future- is it worth the costs of keeping it?
  • Capital gains tax. Dun, dun, dun. The dreaded words of all homeowners and investors… “capital gains tax.” Will you have to pay capital gains tax on selling your rental property? In some cases, like a 1031 exchange, no. But, this would require that you purchase another, similar property. But, because you are selling a rental and not your primary residence, you won’t qualify for the tax exclusions on up to $500k in profit. One way around this is if you know you’re going to sell your rental property in the future, you can move into it temporarily, for two years, and you will then qualify for the tax exclusion.

Ways to Avoid a Capital Gains Tax Hit When Selling My Rental?

Because we know that the last “con,” is a pretty big one for anyone who owns rental property, we wanted to elaborate a bit further. For some, the tax hit is what’s keeping them from selling their rental property. So, here are some ways that you can actually prevent a hit. While not all work for people who are looking to retire, it all depends on your intentions after the sale.

The first optionWell, your first option is actually to just sell the rental and take the hit. If you intend to sell off your assets in order to pay for a primary, permanent residence, then the profits are worth it at the end of the day. But, you will have to pay Uncle Sam a capital gains tax rate of 15% on the sale proceeds if you’re in the 25%, 33%, and 35% income tax brackets, or 20% if in a higher bracket.

Your next option- Your other option, is to offset the gains from your real estate rental with a loss in another area. While no one wants to see losses, in this case, there are benefits. For example, if your stocks took a hit for $75k the same year you sold your rental for a $60k profit, then they basically cancel one another out and you’re off the hook in paying capital gains tax. Read more about tax-loss harvesting here.

Another solution- Another solution to avoiding paying taxes on your sale is to take advantage of a 1031 exchange as mentioned above. In this case, you will be selling off your rental property with the intention of purchasing another rental unit in replacement. This can be a great option if you don’t want to lose out on rental income during retirement and maybe choose to buy a new rental unit in an area with lower taxes and easier demands from you as a landlord. Keep in mind, that you must identify a replacement property within 45 days of the sale, and close on a new property within 180 days.

Your last solution- Your last option in avoiding paying capital gains tax is to move into the rental property for a minimum of two years prior to sale. This will help you avoid at least a portion of capital gains taxes. Why won’t it let you avoid the full $500k or $250k in profit? Well, this is where it gets a bit complicated. Depending on how long your property was a rental vs. primary residence will dictate just how much of the tax exclusion you will qualify for.

Sell Your Rental the Quick and Efficient Way

If you have weighed all of your options and you’re ready to part ways with your rental property and move into a stress-free retirement with a good chunk of profit, then consider all of your options in selling. You can: 1) sell the home as it is to a cash investor and not worry about any delays or repairs, 2) get the property ready to sell and then list it with a real estate agent and get the highest, best offer the market will yield, or 3) utilize your newfound flexibility and time in retirement to list the home yourself and coordinate the sale and marketing efforts.

If you find yourself thinking, “I want to sell the fastest and easiest way possible,” then you should definitely give one of our home buying specialists a call. We can purchase homes exactly as they are, even if ridden with junk, and even if tenants are still in place.

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