How to Sell Rental Property In California

How to Sell Rental Property In California

Signs It’s Time to Sell a Rental Property

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Changing Local Market Conditions

Maybe the town where your rental property sits isn’t seeing much job and economic growth anymore. This means it’s tougher to find tenants, and your property is just sitting there empty. It may be a good idea to sell and put your money into a different investment. If you want to know more about what’s happening in the market, you should chat with a local real estate agent.

Rental Property Needs Repairs

If your rental property has big problems like foundation issues and septic system failure, it may make sense to sell it instead of spending more money on it. Many real estate investors want these distressed properties, so you shouldn’t have trouble selling a troublesome property.

Rental Property is Inherited Property

You may have inherited a rental property but you live out of state, or you think you’re not cut out to be a landlord. If this resonates, you can opt to sell the rental property and cash out, allowing you to realize the gains.

You Want to Retire from Being a Landlord

Property management is not for everyone. You may be tired of collecting rent, finding and talking with tenants, and dealing with property upkeep… These are signs that it’s probably time to cash out for other opportunities.

How to Have a Smooth Rental Property Sale

Selling a rental property can be difficult in any market, but here are steps you could take to make it as smooth and stress-free as possible.

Arrange a Pre-listing Home Inspection

One of the best ways to get the best price for the rental property that you’re selling is to have a clean bill of health from a professional home inspector. An inspector would take a look at every nook and cranny of your property and recommend the necessary repairs to bring it up to standard.

If your rental property has had a lot of problems from neglect, maybe because of careless tenants, it might be smarter financially to sell it as-is to a real estate investor and let them handle it.

Real estate investors usually pay in cash. They can finalize a sale quickly because they don’t have to wait for a mortgage approval like traditional buyers do.

Do a Lien Search

An escrow officer can help you with a title search to find out if your rental property has any other encumbrances you may not know about so you can take care of it ahead of time, ensuring the real estate transaction goes as smoothly as possible.

Study the Tax Implications of Selling a Rental Property

When you sell a rental property or any other real estate assets, tax payments should be made such as depreciation recapture tax, or any remaining capital gains tax.

Depreciation Recapture Tax

Property investors often use depreciation to lower their taxes while owning real estate. But when they sell rental properties, they have to pay back that depreciation, taxed at their tax bracket, possibly up to 25%.

Illustrative Example of Tax Consequences when Selling a Rental Property

Suppose you bought a rental property for $80,000 and sold it today for $120,000 after holding it for five years. During that time, you claimed $10,000 in depreciation.
Let’s say you’re in the highest tax bracket, so a 25% depreciation recapture tax and a 20% capital gains tax apply:
Depreciation recapture tax: $2,500 (25% of $10,000)
Capital gains tax: $8,000 (($120,000 – $80,000) x 20%)
In total, your tax bill comes to $10,500.
Take note though, tax rules may vary depending on your personal situation, so after reading this guide, it would still be better to consult a tax professional or a real estate attorney.

Considerations when Selling a Rental Property to Avoid a Tax Hit

Take Advantage of the 1031 Tax Deferred Exchange on an Investment Property

A 1031 exchange takes its name from Section 1031 of the Internal Revenue Code, and is basically a tax break. You are able to defer capital gains taxes when you sell rental property, but it is subject to the following rules:

• The real estate to be acquired must be for business or investment
• You must use the proceeds to purchase a replacement property of equivalent or higher value
• After closing on the sale of the previous property, you have up to 45 days to identify a replacement property
• After closing on the sale of the previous property, you have up to 180 days to close the deal on the replacement property

There are lots of benefits of a 1031 exchange, foremost among them is an opportunity to invest in a real estate portfolio elsewhere.

For example, if you have a single-family rental property in an expensive housing market such as California (median home price = $505,000), you can proceed to sell it and use the funds to purchase multiple investment properties in another state, say, Utah (median home price = $279,100).

Consider Living in Your Rental Property Prior to Selling to Avoid Capital Gains Tax

When selling your primary residence, you wouldn’t need to pay capital gains tax on a profit of up to $500,000 when filing with your spouse; or, if filing singly, you can have a tax shield of up to $250,000.

However, in order for this benefit to be available to you, you must pass the Internal Revenue Service (IRS) ownership test per the Taxpayer’s Relief Act of 1997:

• You must own the rental home for at least two years
• The 2-in-5 year rule: meaning you must live in the property for two years or more in the five years you have owned it prior to selling the property

From a tax savings perspective, it is more beneficial to sell it as a personal residence than just unloading it as a rental property.

A little reminder though, selling your personal residence does not qualify you for a 1031 deferred exchange.

Evaluate the Property for Possible Tax-Deductible Repairs

Fixing up your property not just boosts its appeal to buyers but also offers potential tax breaks. But remember, these fixes are only deductible if they maintain the property’s functionality, not if they increase its value. Chat with a tax expert for further details on deductible repairs.

Use Tax Harvesting to Offset the Capital Gains

Not every property in an investor’s collection turns out successful. Occasionally, you might need to accept a loss if the investment property isn’t meeting expectations.

However, you can utilize this loss to balance out the profits from another property you’re selling in the same tax year. This practice is known as tax harvesting.

For instance, suppose you own a rental property with a negative equity of $35,000 and another property with a $60,000 gain. The loss will be deducted from the gain, leaving you with only $25,000 in taxable capital gain.

Selling Rental Property with a Tenant

Selling a tenant occupied property is much easier if you have an early termination clause in the lease agreement, you would just follow the procedure outlined in the next section.

The current lease can be terminated on the following grounds:

• Terms of the lease were not honored by the tenant
• Property is grossly neglected by the tenant
• Landlord has been repeatedly unable to collect rent
• Landlord wants to sell the property

However, even if you don’t have an early termination clause in your contract, you will still be able to sell your tenant occupied property, you just have to do any of the following:

Wait for Your Tenant’s Lease Expiration

If your renter sticks to the rules and pays rent promptly, they’re entitled to stay for the whole lease term. You must respect the contract and hold onto the property until the lease ends before selling. At least you’re earning rental revenue while you wait.

Sell Your Rental Property with an Active Lease

Many landlords prefer rental properties that generate consistent income. If you’re ready to sell and pass the responsibility to a new owner, you have that option. The new owner can choose to let the current lease end or renew it.

Offer your Tenant to Vacate

You can also incentivize your tenant to vacate the premises when you are ready to sell so it will be a win for everyone. You can compute the incentive based on the following:

• Moving cost
• Rent differential – For example, there is a nearby property your tenant could move into, but the rent is higher. You could offer to pay for the difference for the remainder of their current lease
• Security deposit – Moving to a new property would mean putting up a security deposit equivalent to a month’s rent. You could help out your tenant by offering to pay this for them
• Lump sum – If a decent profit from selling your rental is on the horizon, you can offer your tenants a larger sum to encourage them to move

Steps in Selling a Rental Property

After resolving tax issues and when your rental property is empty or you’ve reached a positive agreement with your tenant, selling it is akin to selling a regular house. Depending on its state, you can choose among three primary methods to sell a rental property.

1. Real Estate Agents

2. For Sale By Owner

3. Real Estate Investors

Can Probate be Completed without the Involvement of Probate Court?

Closing Thoughts: How to Sell Rental Property
Without Paying Taxes in California

You have options to make money from your investment without paying a big tax bill.
You can: sell it as your main home; do a 1031 trade; use tax cuts; or do tax-deductible fixes. Even then, selling a rental can be tough, and there’s a lot to figure out.

At JiT Home Buyers, we make selling easy. We buy all kinds of properties–even rentals in bad shape.

Ready to sell? Fill out the form below for a quick, no-obligation offer! We can close in just 7 days, and we pay all closing costs!
Want to chat? Call us at (510) 473-5885. We’re here to help!

The Easiest Way To Sell Your House Fast In California

You’re in the driver’s seat when you accept our cash offer for your house. We make the process simple, fast, and easy to follow when working with us. You have no obligation to accept our cash offer for your home when contacting us for a fair cash offer for your home. No matter the reason you want to sell your house, we want to buy your home as is. Remember that you get many benefits that include no real estate agent commissions, no cleaning, no improvements, and no stress. Our cash offer for your as-is house assures you of fast cash payment at closing with a reputable Title company. You can count on our company to give you a fair cash offer for your home! If you’re still thinking, “I need to sell my house fast”, calling us could be your best decision all day. 🙂

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