Investors may be a point where they are ready to sell an income-producing property. Perhaps the neighborhood is changing, or substantial repairs are needed on a property. Owners may want to leave the effort to someone else and reinvest any gains into a new property. In addition, some may want to sell a single-family home in order to buy a multifamily home which could offer them a better return. When it is finally time to get serious about selling a property, what are some of the important considerations that come into play when selling investment properties?

Those new to owning and selling investment properties will find it useful to be aware of some issues and challenges that may arise when selling an investment property. Understand more about selling investment property prior to listing to make for a smoother process.

Know Local Tenant Rights

Sellers may not be aware of local real estate laws. In some areas, such as in Washington, DC, tenants have certain rights that may make it potentially more difficult to sell an investment property. This “first right of refusal” given to tenants means that landlords have to do more work to inform a renter of changes and a desire to sell.

Tenants need to know details about the property when it goes to market and the tenant has a two opportunities to make an offer. Those planning to invest in rental properties or preparing to sell need to know whether or not there are any tenant rights that may complicate the selling process.

Prepare to Pay Capital Gains Taxes

Selling an investment property is different than selling a primary residence. An investment property generally produces an income and the IRS wants a piece of the profits when a home is sold. Homeowners with houses that have depreciated before being sold would need to pay less in capital gains taxes than those that have gone up in value. The majority of investors may want to prepare to pay approximately 22 percent tax when a rental property is sold.

Those who want to avoid paying capital gains may want to do a 1031 exchange and in essence degree the tax on the original property by purchasing a similar property. Speak with an experienced tax accountant as there are other ways to reduce or eliminate paying property taxes on the sale of a property. In some cases, individuals who have lived for a period of time on the property before planning to sell the property may claim it as a primary residence and not have to pay capital gain tax when the home is sold.

Understand Buyer Options

An investor may want to sell a property to their tenant outright, offer a rent-to-buy option, or sell a home to another investor or potential buyer. Those who invest in a property can turn a profit when holding an investment property over the short or long-term. However, there are many factors to consider. Some may want to sell to a tenant at a reduced price to quickly move on from a depreciated property.

Others may want to sell an appreciated home for a higher value and attract a wide circle of buyers. Expiration of tax abatements may be another reason to sell an investment property. Talking with a tax accountant and agent experienced in selling investment properties in the area can help with determining a plan of action.

Other Considerations

It can be harder to sell investment properties when compared to other investments. It may be months after a listing when a buyer makes an offer. Also investors may have to set up an escrow account to take advantage of the 1031 exchange and reduce their immediate tax burden. Sellers in Edina or elsewhere should investigate the requirements and local regulations prior to listing a home in order to avoid potential headaches and have the time necessary to make proper arrangements and inform tenants.