How to Know When It’s Time to Sell Your Rental Property

April 19th, 2016 by Property Alliance

Selling a Rental Property - When is the Best Time?

There comes a time in every property owner’s life when you decide that it might be time to consider selling your rental property. However, it’s just as crucial to put as much thought and analysis into timing the sale of your rental property as you did when you initially purchased the rental property. In fact, we would go as far as to say that choosing the right time to sell your rental property may even be more crucial to your success as a real estate investor.

Holding onto your property forever is the ideal situation, when you ask real estate investors. However, realistically, things happen and there are many situations where it might make sense to sell your rental property.

Let’s look at a few scenarios where it might make sense to sell your rental property.

When your depreciation benefit runs out. Depreciation is a non-cash expense which every rental property owner can take. However, after a certain number of years, the depreciation tax deduction is used up on a property. You’ll want to work with your accountant to calculate when this depreciation is no longer applicable. When your investment can no longer be depreciated, it’s a good time to sell that property.

If you have reached the age of 59 ½ and are eligible to tap into your 401(k) or IRA. This scenario makes some assumptions – specifically that you have been contributing to your 401(k) and/or IRA, and that you have had your rental property for awhile.

The thought process here is that you receive the income and taxation benefits from your rental investment until your reach the age when you can start withdrawing from your 401(k)/IRA without any early withdrawal penalties. Then you can sell your rental property at a large profit and start taking withdrawals from your 401(k) to replace that monthly income.

When you have owned your rental property for 12 years. On average, the 12th year of rental property ownership is a good time to consider selling. However, the decision is not made just on that 12 year mark. It will depend on two specific factors.

  • Do you have enough equity in the property to sell?
  • Does the current real estate market allow you to sell at a substantial profit?

We recommend working with a real estate professional to complete a current market analysis for your home to help answer these two questions.

You are experiencing a negative cash flow situation. Any time you are losing money on a property every month, it is costing you more money to own and maintain it than the rental income it brings in. This is obviously not a good situation. Chances are you didn’t start off in this situation, and there are many factors that contribute to a property switching from a positive to a negative cash flow.

Losing money every month is a strong indication that you need to reevaluate and consider selling your property. However, we would urge you to evaluate the situation and not just automatically sell when you have are encountering a negative cash flow on your property. Consider questions like:

  • Are rents expected to rise in the near future?
  • What are the tax implications? Will a gain be taxed as ordinary income or a long-term capital gain?

We definitely don’t endorse holding onto a property that is hemorrhaging cash, especially if you don’t see the situation improving. But it is always important to stop and ask yourself some solid questions before selling.

Ultimately, your plans on whether to sell or not should line up with your short and long-term goals that you hopefully set when you bought your property. As with any investment, though, there are times when you need to cash out or cut your losses. Don’t be greedy, analyze the situation thoroughly, and ask for advice from tax and real estate professionals. These things will ensure you are making the right decision for you, your family, and your overall wealth.

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