10 Tips for Selling a Rental Property: Navigating Taxes and Tenants


Owning your own rental property can be indeed fulfilling. But when the Taxes come raging the story may change. A Hummelstown, Pennsylvania real estate investor, Kyle McCorkel knew exactly what to do after property taxes for one of his properties got a sudden rise to over $2,000 per year. He quickly realized that selling was the best thing to do at that time. And shortly after, there was a housing market boom as a result of the pandemic which encouraged him to discharge extra two rentals while prices sizzled.

“My expenses were going up faster than rent was going up, so I decided to seize the opportunity to cash out and move my equity into better-performing investments,” McCorkel says.

Long-term real estate investors sell a rental property for a wide range of reasons. However, selling a property may not turn out rosy as you may have heard, but then, there are tricks and tips for selling a rental property.

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These tips are provided by experts in the field that help to uncover how you can make a successful property sale while also navigating tenants and taxes.


1. Do not get carried away by huge capital gains taxes

The upside you receive when you sell a house where you have owned for 24 months and have lived in majorly also for 24 months of the past five years is often tax-free. You could generally rake in a profit of about $250,000 if you are single, and $500,000 if you are married without having debts in taxes.

But then, property investors do not enjoy these same generous capital gains tax breaks from the IRS – the rules aren’t the same.

Rented properties will not qualify you for the ‘use’ test of capital gains exclusion. In essence, when you make profits that are even below the $250,000/$500,000 threshold, it could be taxable.

And if the rental property has been your own within a year or less, the profits would be put into consideration as short-term capital gains, that will be taxed at equal rates as your revenue. In essence, you could owe between 10% and 37% tax code at this time, depending on your tax bracket.

If the property has been your own for over a year, the long-term capital gains are taxed at a reduced rate. And with taxable income that is less than $80,000, you’ll not be hooked on capital gains taxes, even with more amount, there are ways you can still navigate avoiding them.


2. Live in your rental property before putting it out for sale

Moving into your rental home before putting it out for sale is a feasible way to sell a rental property and cutting out taxes. So long you reside there for a minimum of 24 months, you’ll pass the ‘ownership and use’ test by the IRS.

It often requires that you have the ownership of the house for a minimum of two years, and have lived there for at least two years of the past five years. After excelling with the IRS test, you’ll be qualified to waive capital gains taxes for up to $500,000 jointly, and $250,000 for single. But then, you may want to unload it if the rental property investment turns sour. This would help to cut on your losses.

3. Bring In A Reliable Tenant As Your Selling Point

Occupied properties are much preferred for some investors than unoccupied ones. It is important to note that if you are putting out the property for sale with a tenant, that you will be marketing only to investors, so you could add information that would interest investors in your listing.

Some of the important information to include are:

i. How much the monthly rent is.

ii. How long you have had the tenant.

iii. How consistent the rent payment is.

iv. Utilities covered by the tenant.

v. When is the expiry date of the lease?

vi. What licenses, security deposits, and other permits are made available with the lease?

vii. What is the maintenance culture of the tenant?

You may also want to consider encouraging your tenant to get cooperative as much as possible through the process of selling with some nice incentives, such as rent discounts or gift cards. This may encourage the tenant to ensure the best outlook of the property.

4. Defer capital gains taxes with the 1031 exchange

It is perhaps time to unload a rental property that isn’t doing well in a diminishing neighborhood and give consideration to a developing location. The 1031 exchange could help you sell out one property to purchase another of similar features and better income potential without the need to pony up capital gains tax.

You’ll have ‘like-kind property, which means that the 1031 exchange can only be used to acquire another property for rent or flip, and not for personal residence. And once you’ve sold the first property the clock starts ticking. You must be able to uncover three properties that you’d like to buy within 45 days and 180 days to close on the desired property.

The founder and CEO of an advisory service of New York’s new investors called Rental Income Investors, Eric Hughes state that in addition to the timing of the sale and subsequent purchase, there are other necessary rules that must be adhered to with a 1031 exchange, so it is important as a first step, to contact a qualified intermediary who can help with simplifying all areas of the exchange to ensure that all the required steps are adhered to.

5. Avoid counting on rental income to inflate value

While a reliable and well-paying tenant could help make your single-family property more investor-receptive, but then, do not expect to drive up prices.

So, when you raise a tenant’s rent, it would rather make investors who are in need of a reliable rental income attracted, and not have an effect on the appraised value.

6. You should either respect the period of your lease or give tenants sufficient vacation notice

You may want to consider offering your tenants incentives to vacate your property if it is occupied when you are deciding to get it sold. But then, if you think your tenant is a good one or they just won’t leave, then it is important that you respect the terms of the lease.

The lease agreement in most states will be moved upon sale and the new owner will be eligible to make required changes upon expiration of the lease. Robert Taylor, who has had about 20 years of renting and home flipping experience in California says:

“If your tenant has six months left on their lease, then buyers will have to accept the lease agreement as part of their purchase.”

The rule in his state states that a landlord must give at least a notice of 30 days to tenants who have occupied the home for less than 12 months, and for those that have lived there for a year would have notice of 60 days.

“Additionally, evictions without cause are currently prohibited due to federal moratoriums,” Taylor warns.

7. Target Buyers Through Paid Ads

Paid ads on social media platforms such as Facebook are very effective in finding potential property buyers. Facebook is very effective with reaching everyone who may be interested to buy property and helping them find the property. You can do your targeting by interests, location, and more.

Instagram, Twitter, Pinterest, and even LinkedIn are also efficient with selling a rental property. You may need to learn the tricks to doing an effective ad or get the service of a professional to help out.

8. Avoid Over-valuing your property

When it comes to pricing, it is important that you are very realistic and competitive. Most of your target investors are not going to be ignorant of a location, market, and average pricing.

Overpricing a property may only put you at the losing end. It makes no sense to do it for a bigger profit. Ensure to organize all the figures accurately. Projecting very high rents and concealing the expenses will not work out positively in the long run.

9. Collaborate with an experienced realtor

It is very essential that you bring on a real estate person who is well informed as regards home investment a lot. These kinds of agents can provide you with recommendations of easy upgrades such as hot tub, bedding arrangements, and some other amenities. that can increase the income that gets to you.

It is also advised that you go for a real estate agent who has a property management side to their engagement. These companies – aside from being versatile in the market and rental industry – often have a list of potential investment buyers they leverage on.

10. Appeal to potential buyers with great-looking photos

Photos speak a thousand words. And since you do not want to pass across negative impressions about your property, it is therefore important that you hire professional photographers whose main gifting is on real estate. These photographers will be able to provide you with the top-level interior appearance of the property.

They will help to bring life to the whole outlook, by appealing to the lifestyles angle of the property. But before then, ensure to put in your best to styling the room and other spaces for an appealing capture. So, even when your prospective buyers are viewing the property from their different locations, the images will be sufficient to get them to fall in love with the property.

So, allow the images to sell the properties by making them immediately relatable with good decorations and furnishings.

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