An investment property, by definition, is a place with one simple goal: to make money. So if you want to learn how to sell an investment property, we’d wager that maximizing those profits is likely your top priority.
In many ways, the steps to selling an investment property are the same as selling a home where you live: You hire a listing agent who will market your property on realtor.com® and start bringing in potential buyers. Still, since investment properties operate under different rules taxwise than a home where you live, you’ll want to ask certain questions.
Here are the factors to consider—plus the fun part: how much money you could stand to make.
Should I sell my investment property?
First things first: Are you sure you want to sell? Because there are other options that could drum up income—steady income—such as renting it out.
Whitney Nicely, principal broker with Whitney Buys Houses in Knoxville, TN, has more of a buy-and-hold mindset. “It’s silly to sell the one you have unless you have a really good reason,” Nicely says. So yes, there are valid reasons to sell, but you should make sure yours make the cut:
The neighborhood is changing.
The property needs massive repairs.
It’s a tax liability.
You could get a better return elsewhere
Who will buy an investment property?
Even though you’ve used the property as an investment, the home may attract actual buyers who want to live there in addition to landlords and investors. In fact, if your investment property has renters in it already, you will probably want to give them the option to buy the place since they might prefer to stay put and be happy to pay for the privilege, which also makes your job easy!
Tax considerations to take into account
Yet with the sale of an investment property, you will incur capital gains tax. It could be a long-term capital gain, which applies to properties held for greater than a year and is taxed at a lower rate. Or, the property may fall into the short-term capital gain, which is taxed like ordinary income. In most cases, it’s smart to work with a trusted adviser to figure out how taxes will affect your sale.
You may also want to know the transfer taxes in your state and determine if a 1031 exchange is a good choice. The exchange of like-kind properties may defer the recognition of capital gains at sale time, which can defer tax due. It’s a strategy LaFrenais frequently recommends: “There is no limit to how many times you can do a 1031, so you can continue to swap like-kind properties and grow your investment tax-deferred.”
How much can you make selling an investment property?
While your exact profits will vary widely depending on your market, statistics from RealtyTrac suggest that people who flip homes—meaning buy a run-down property, renovate it, and then sell it—yield an average gross profit of $58,250, or 50% more than what they bought it for! Granted, that’s gross profits, which don’t include money spent on renovations. Still, that’s a healthy return by any standards in a very short span of time.
Still, though, not all investment properties are “flips”; others may be homes you’ve bought, held, and rented out. In those cases, the return will depend on how much prices have appreciated in your particular market, how long you’ve held the property, whether you’ve had a mortgage on the place, and other factors. But in general, if the property is held long enough, real estate prices have nowhere to go but up, so odds are you’ll come out ahead!
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