Selling a Home with Renters
When you are selling a home while tenants are renting, the two most important considerations are how to handle your own tax liability and whether you sell the home vacant or occupied. When these two concerns are resolved, or at a minimum completely thought through, your chances of selling the property in a reasonable time-frame go up.
Let’s peel the layers back and see how to sell a home with renters so you can begin to plan a successful strategy and sale.
Get Your Tax Strategy Straight
The first thing you need to know about selling a rental property is that your tax situation is different – and more complex – than when selling a primary residence.
When you sell a primary residence, IRS rules say that you’re exempt from paying taxes on any capital gains up to $250,000 for a single person or $500,000 for a married couple. Given Warner Robins home prices, this generous IRS provision means you’ll likely not pay any taxes on your home’s appreciation when selling a primary residence.
However, when selling a rental property, there is no IRS exemption, so you will pay capital gains taxes on your appreciation. The calculations are complex and specific to your profile, so you must consult a tax adviser to get accurate figures, but here’s a very simplified capital gains tax estimate.
Subtract purchase price, cost of improvements you made and total selling cost (including agent, title, and local tax fees) from sales price. The resulting number is your capital gain, and you’ll pay federal and state taxes of about 25-30 percent (based on your tax profile) on the capital gains.
If you bought a home in Warner Robins for $75,000, made $2,000 in improvements along the way, and are now selling it for $100,000, your estimated capital gains would be about $16,000. If you paid 30 percent federal and state capital gains taxes on this, your estimated tax obligation would be about $4,800.
You can avoid this tax hit if your intent is to buy a new rental home immediately after you sell. If so, you’re also eligible for an IRS benefit called a tax-deferred exchange, also known as a 1031 Exchange, named after the IRS code number. The exchange allows you to avoid paying the capital gains taxes at closing as long as you identify a new rental property to buy within 90 days and close within 180 days of closing your sale.
To get the full tax benefit, the new purchase must be of the same or greater than your sales price, and you must put every penny of net proceeds from the sale into the new purchase.
Your agent, tax, financial and mortgage advisers can give you more details.
Cases for Selling With or Without Tenants
Once you know your tax plan, you have decide if you want to list an occupied or vacant property. Each side of the debate over selling a home with or without tenants has its merits.
Many argue that sellers should wait for a tenant lease to expire and sell the property vacant, so the property is most marketable to all buyer types – owner-occupied buyers, second home buyers, and buyers who want to rent the property out.
The other side of this argument says sellers should sell while the tenant is still occupying the property because the property will look better furnished, and buyers can more easily envision living there. Of course this option could backfire if the tenant does not want to move and makes the process difficult. Home that are not clean, have tenants present, and are difficult to schedule viewings often get skipped by finicky buyers.
Essential Math for Rental Property Sellers
Your financial situation will ultimately dictate which side of the debate you settle. The example below contains the math required to help you make a decision.
If your list price is $100,000, which is just below the Warner Robins median list price of $119,500, and you bought the home eight years ago for $75,000 using a 30-year fixed loan of 4.875 percent, you can use a mortgage calculator to determine that your balance now is $64,199.
Then, using the capital gains formula above (assuming you’re not doing a 1031 Exchange), you know that you’ve got about $4,800 in taxes that need to be paid.
So you can estimate that you’ll walk away with about $24,001.
You also know that your existing monthly obligation – mortgage payment, property taxes and insurance – is about $597. Let’s say you’re renting the home for $700, which is well below the median rent of $875 for apartments in Warner Robins. You will be making $103 per month.
Here’s what this information tells you: if you sell the property vacant, you’ll forego rent for 2-6 months during the sales process, which means you’ll go from making $103 to paying $597 per month, or $3,582 if it took six months to sell.
If that’s too much for your budget, the decision is easy: sell with the tenant in the home. But don’t forget to ask your real estate agent if a tenant-occupied home risks reducing the property’s resale value.
If you found this information on how to sell a home with renters helpful, please share it so others can also benefit from the information.
More Selling with Renters Resources
Georgia Landlord-Tenant Handbook via Georgia DCA
Selling a Rental Home to the Tenant by PocketSense