4 Critical Things to Consider When Selling a Rental Property
So, you’re thinking about selling a rental property. The reasons for considering selling your investment property can vary, and the right timing comes down to the individual, but here are some things to consider to determine if the time is right for you.
Have your investment goals changed? You may be at a different stage in your life than when you purchased your rental property and it’s important to adjust your investment portfolio based on those goals and the stage of your life you’re in.
Do you need the equity for other purposes? Often life events mean we need money for other aspects of our lives. That may be a signal it’s time to sell your investment property.
Are you approaching retirement? If so, selling a rental property to invest the proceeds into other vehicles may make sense. A retirement plan can help you project and determine your required rate of return in retirement, your income needs and how much of your capital you need, and when.
At the time of writing, real estate prices in many areas of Ontario, in fact, the entire country were setting records. If you are selling to move that money to another investment vehicle, this may be a good time to sell a rental property. Where are prices headed in your area? Get in touch if you’d like an opinion on where your market is heading
Another thing to consider is the rental market. If you find that rental prices are dropping, they may no longer be providing enough income to support your investment and upkeep. Then it’s time to sell.
The tax on the sale of an investment property will come from two sources: capital gains and recapture. Because it’s not your primary residence, when you’re selling a rental property you will be taxed on 50% of your capital gains.
The capital gain is essentially the value that the property has increased from the time you bought it. The good news is that you can claim any improvements that have added to the total value of the property.
For example, if you purchased a condo for $450,000 and sold it for $700,000, the capital gains would be $250,000. But, if you renovated the kitchen and spent $40,000, that cost can be added to the initial cost of the home and won’t be taxable. So, your capital gains would only be $210,000 taxed at 50% ($105,000).
If you’re earning a full-time income this can be a lot of tax to absorb at one time. It may make sense to delay selling until you are retired or partially retired if that’s an option.
Property Repairs are Getting to Be Too Much
All properties require upkeep, especially as they age. If the upkeep on your investment property is growing and becoming too much to handle, that’s a good sign it may be time to sell before those costs start to strip away your profits. Or maybe you’re just tired of the stress of keeping up with renters’ requests and you no longer want to spend the time it takes to be a landlord.
In the end, every investment property and every situation is unique and there’s no single “best time” to sell. Consider both your immediate and longer-term goals when thinking of selling a rental property. It might be a good idea to sit down with a financial advisor and look at all the options before making a decision.
If you are thinking of selling a rental property, our Property Concierge program may be of use to help you get the maximum price for your sale without the need to invest upfront for renovations.