Do you own a rental property in Minnesota and want to get into the real estate market? If so, you may want to try selling a rental property. When doing so, you may need to work with a real estate agent and inform your tenants of the rental property sale. You should have spelled that information out in the lease terms when finding tenants.
There’s plenty to consider when entering the housing market in Minnesota. For instance, depending on the home purchase price, you may need to pay a capital gains tax. To learn more about the sale of the property when you have renters, read the guide below. Let’s get started!
Tips for Landlords Selling a Rental Property
Landlords looking to sell their property will need to consider multiple factors. First, a rental property sale is likely to have a capital gains tax, which can get more complex than that in a standard home sale.
Generally, you’ll have a significantly larger capital gains tax from selling a large rental property than a single-family home sale. You will also need to cover the real estate commission fee of your realtor and the buyer’s real estate agent.
Furthermore, if the property lost money and you claimed depreciation on a prior tax return, you’re likely to see a larger tax payment once you complete the sale to a new owner. If you bought a property for $250,000, sold the place for $300,000, and claimed depreciation of $50,000 in a prior year, you will need to pay capital gains taxes on $100,000.
The biggest tip we have when selling rental properties is to avoid the long-term capital gains tax through real estate investing. We suggest that real estate investors consider re-investing their funds in a like-kind property via the 1031 exchange.
The Internal Revenue Code Section 1031 from the IRS ensures that investors who further re-invest their money don’t need to pay a capital gains tax. However, you need to put the funds from the sale toward an investment meant for renting or flipping instead of your own private residence. Otherwise, you won’t get to defer the capital gains tax.
Before you invest in a new property, work with a real estate attorney to put your funds into an escrow account. To protect property owners and real estate investors, we also suggest incorporating and becoming a corporation. That will help a landlord protect their finances and assets from legal action. Corporations also have a more beneficial tax bill and tax rate.
However, if you have only a few holdings, you may benefit more from operating a limited liability company or small business for every property. That will make it easier to have direct access to your earnings from each property.
You will also need to notify tenants of any potential sales. However, you cannot give your tenants a notice to vacate until you have signed the Purchase and Sales Agreement. These are a few significant tips landlords should follow when selling their properties.
What To Do If You’re Planning To Sell A Rental Property
When planning to sell a rental location, you will need to determine the property value and the sale price you’re willing to list it. Remember that you can’t expect a high rental income or a rise in rent to translate into your property’s overall value.
You will also need to assess what type of repairs the property may need and the renovations you can afford.
When selling an investment property, it’s not always easy to find a buyer willing to accept your place in its as-is condition. As such, you should fix that jammed door, broken toilet, or leaky faucet to get more buyers interested in the property. You can also complete landscaping to increase the property value.
You may also want to seek the help of a tax professional to ensure you can avoid either the long-term or short-term capital gains taxes as well as cover any prorated property taxes.
Furthermore, you will need to follow all the laws when selling a house with tenants. For instance, you will have to fill out a general disclosure form and disclose important aspects of the home. These aspects may include:
- Any structural changes that you completed on the property
- Whether any tenants had pets in the home
- How long you might have lived in the residence before becoming a landlord
- Whether the home has lead-based paint if your building was constructed before 1978
You will also need to answer questions about the roof’s condition, plumbing, tiling, and HVAC system when filling out the disclosure form.
One of the most important things you’ll need to do when planning to sell a rental home is to hire a real estate agent specializing in investment properties. Such a realtor can help you by providing insight into local rental market trends, the tax requirements of selling rental properties, and your predicted return on investment (ROI).
Yet, if you have decided to forego working with a realtor to avoid the real estate commission fees, you should consider selling house online. These are a few of the steps you’ll need to follow when selling a rental location.
Should You Sell a Rental House?
Right now, there are numerous reasons why you should consider selling your rental house. The real estate market is still strong for sellers and your property’s value has likely increased significantly. Essentially, if your rental home’s value is now higher than when you bought it, you should gain a real profit once you sell it.
Furthermore, if your cash flow is in the negative and you’re losing money as a landlord, you should probably consider dropping out of the rental business and selling the properties. The real estate market also shows that demand from buyers is high. That means you can likely get a good offer or even see a bidding war take place.
Additionally, if you see that the rental market has become less profitable or negatively impacted your income, it might be time to sell. Certain neighborhoods see less demand for rentals. More construction with no rise in the renter population may lead to a drop in rental prices. That may also make it easier to walk away from being a landlord.
Whether your property is growing in value or depreciating, you may want to consider selling the place. That way, you can either make a profit or not lose out much more if the value is expected to continue dropping.
Further, you may have seen property tax rates increase for your rental homes. To avoid shelling out more money and ending up with a negative cash flow, you may want to sell the place instead. These are several of the biggest reasons why you should consider selling your rental house.
Do You Have To Inform Your Tenants If You’re Selling?
You can sell a property even if you have tenants living in the rental location. However, you will need to inform them of the sale and allow them to finish living in the home until their lease is up. The best option is to have your tenant sign a month-to-month lease in case you want to sell the place or the tenant decides to move.
However, if the tenant has a long-term lease, you may want to provide a financial incentive to the renter to change the terms of the lease. However, if tenants are still living in the property when you begin house viewings to prospective buyers, you will need to market the place as “vacant upon closing.”
Negotiating that your renter moves out earlier than initially agreed upon in the lease may get complex. The renter can refuse to leave and the new owner may have to evict the tenant. As such, you may want to wait for the year-long lease to end before putting the property on the real estate market.
Regardless, you will need to let the tenant know that you’re selling the property and why you want to sell it. You should also pick times for showings that work well for your tenant’s schedule. Make sure the renter is not around during showings. Another excellent idea is to help your tenant find a new place to live.
Following these steps can make selling your rental home much easier.
Selling a rental property does have a few more complications to consider, but finding potential buyers for your rental building is possible. You may want to consider re-investing your money and buying a similar rental property after the sale. That way, you can avoid paying the potentially large capital gains tax.
You will also need to inform your tenants of the impending home sale. It’s best to have month-to-month rental leases to ensure you can more easily sell the location.
If you want to sell a house fast in Shakopee, you may want to reach out to other real estate investors or cash home buyers in Minnesota. Luckily, you can contact us, as we buy houses Minneapolis residents love.