When should I decide it is time to sell my rental?

While we aren’t CPAs, you can look up the tax code and find out that you can sell a primary residence with a gain of up to $250,000 as an individual tax free or up to $500,000 if you are married. tax free. This rule applies if you have made the property your primary residence for at least 2 of the last 5 years. In Southern California where the gains can be in the 5-10% range annually over a 5 year where the median home value in Los Angeles County was valued at $650,000 in 2020, then taking a tax free gain can be pretty tempting. If it were only that easy then many people might sell each time within the 5 year window, so why do so many decide to keep their rentals? We invite you to consider a deeper thought process to help you decide what is right for your goals.

When we work with property owners, sometimes it is their first rental and that is great. At times that means they use that first rental as the foundation of a real estate portfolio and at other times they decide that owning a rental just isn’t for them. Regardless of their decision we are here to help them in their mission

If selling is the right decision, we do have a division that is designed to help our rental owners sell their investment properties. Especially those owners who meet the requirement of having occupied the property 2 of the last 5 years as their primary residence we understand the objective of taking those tax free gains vs. taking the long term gains that are offset by depreciation.

For those owners taking the gains on their investment property the main question we ask is “what is your goal with the gains from this property?” While certainly people don’t have to answer, our main purpose in asking the question is ensuring there is a plan in place after the sale. With any of our clients we want to make sure we help them achieve their goals, even if that means we don’t benefit long-term.

For many long term property owners this has proven to be a great strategy. A 1031 exchange allows you to defer the taxable gain. In other words you could have a gain, north of $500,000 (if you were married) and delay the taxable gain. For many property owners, especially those in Southern California, it can allow you from being a single family rental owner to a 2-4 unit property owner.  

For example, just envision that you are the owner of a $700,000 single family home owner in Long Beach and you have a dent position of $150,000. Your gain, even with fees, would likely be north of $500,000. Provided that you are looking to put a minimum down on your next income property that would allow you to invest in a property north of $1,500,000 giving you access to a wide array of real estate options (2-4 units or even larger) throughout Long Beach.

End of Depreciation Period

The decision to sell might also come due to the end of the depreciation cycle of your residential income property. The tax code (please check with your CPA) allows a depreciation expense for 27.5 years. If you have owned a residential income property, especially in Southern California, for 27.5 years it is likely that you have a large gain available and it could just be time to sell. Of course if you are in that position we would recommend meeting with a CPA and even including us to explore your options in up leg properties to see if a 1031 exchange might be best.

Whether you want to take a tax free gain, are considering a 1031 exchange or you are at a crossroads due to the end of depreciation we understand the decision isn’t an easy one. When you want to find out more about your options invite you to call us today (562) 888-0247 and we can share our experience. When you are confident you want to continue to rent out your property we invite you to fill out our Free Rental Analysis where we perform a comprehensive comparison to share your rental stacks up to the competition.