How to Sell Rental Property Idaho
Rental properties are a great source of monthly income that can cover mortgage payments and provide investors with extra cash. When Idaho rental properties are sold, investors also enjoy immense profits. However, it may also result in a significant burden in the form of capital gains tax.
When selling a rental property, the investor has four major options—sell the rental to cash buyers or other real estate investors, wait for the lease agreement to expire, sell the Idaho rental to the tenant, or pay the tenant to leave and then list in the real estate market. Whichever option you choose, there are some tax implications you would face.
To learn more about selling a rental property, read this blog all throughout! Here, we go deep into the tax rules involved in selling a rental home, preventing tax hits, and all possible selling options.
Reasons to Sell Your Investment PropertyIdaho
If you're just exploring the idea of selling your rental property, it is helpful to learn when is the right time to sell. Usually, your reason for selling dictates if it is indeed the right time.
This section covers 10 reasons why you should sell your investment property in Idaho!
The Level of Equity Is High
If you bought a fixer-upper and successfully flipped it into a rental, you can expect property appreciation over time. It's how investment goes in a housing market.
When the rental property has already gained enough equity or its value is now more than how much you bought it, it is already the perfect time to sell. This happens when the Idaho neighborhood keeps thriving and growing.
Selling your rental in this case can help you earn more than renting the property out.
The Tenants Are Troublesome
It is not unusual for landlords to encounter tenants who are very difficult to deal with. These tenants file constant complaints, don't pay on time, annoy the neighbors, and are generally hostile to anyone.
Sometimes, these Idaho tenants are very stubborn and they won't move out even after how many times you ask them to. To cut all the stress they're giving you, just sell the rental home as-is.
There Is a Strong Housing Demand
Some areas are booming lately; hence a stronger housing demand. If your rental property sits in one of these areas where there are more buyers than sellers, your Idaho property value would significantly rise and it would be so much easier to sell.
The Rental Needs Major Repairs
A rental that isn't well-maintained is prone to repairs. This is also true if a tenant purposefully did some damage to the rental property.
If the repairs are minor such as changing the smoke detectors, fixing leaking pipes, or replacing the water heater, they won't incur much money.
But if the issues are major such as fixing water damage, replacing the HVAC system, repairing the septic system, fixing termite damage, etc., the cost of the repairs may put the investor in a very difficult situation and it might make more financial sense to sell the Idaho rental to potential buyers.
The Rental Property Is Inherited
Heirs who have inherited investment properties may have a hard time maintaining them, especially if they have no knowledge of running such a business.
Instead of dealing with tenants, repairs, Idaho taxes, and possibly mortgage payments, selling the inherited property is a much better option.
Being a Landlord Becomes Too Stressful
While being a landlord of a rental property has its perks, it is also very stressful and time-consuming. You should always be available for your tenants in case they have concerns and you also have to deal with other stressors such as floods, earthquakes, etc.
If the stress of being a Idaho landlord is no longer worth the monthly rent your tenants are paying, just sell the rental property.
The Rental Has No Positive Cash Flow
Owning a rental property is a numbers game. Of course, you are running a rental to earn, and if it's no longer the case, you should definitely consider selling.
There are many reasons why your rental cash flow is dwindling— costly insurance, taxes, utilities, dropping real estate market rents, lost rent, etc. In some cases, you just have to reevaluate how you're running the Idaho rental to get a positive cash blow.
However, if it's been months or years and you're still not seeing any decent profit, selling is really a better alternative.
You're a Remote Landlord
Managing a rental property while you're living in another state or country just isn't possible. You would have difficulties dealing with repairs and maintenance and you wouldn't be present in case your tenants are facing some major issues with the rental property.
Being a tenant, in itself, is already difficult. Doing it remotely adds another layer of challenge to the task. Everything would be easier if you just let go of the Idaho rental property.
Tax Consequences of Selling a Rental Property Idaho
When you sell a rental property, you'll definitely incur taxes that are more than what you'll pay if you sell a family home.
If in selling a family home, you can get a Idaho tax break if you meet some criteria, in selling a rental, all your profit is taxable. There's also the possibility of depreciation recapture.
Landlords who are new to the business may find all this tax jargon confusing. As such, here's a detailed guide on the tax consequences of selling a rental property.
Capital Gains Tax
Generally, capital gains are the tax collected by the IRS for every real estate sale. This is derived from the difference between how much you bought the rental property (plus other acquisition costs) and its current purchase price.
Capital gains taxes are categorized into two— short-term and long-term. The rate of tax payments depend on how long you have owned the rental property.
Short-Term Capital Gains Tax
Short-term capital gains occur when the Idaho rental property is held by the landlord for less than a year. These capital gains are taxed just like regular income. In other words, the rental property owner should pay the set income tax according to his tax bracket.
Long-Term Capital Gains Tax
If the rental has been in the Idaho owner's portfolio for more than a year, he would have to pay long-term capital gains tax. This has a more favorable rate. However, you still have to pay a lot of money.
Important Note: Whether you have short-term or long-term capital gains, if you are a high-income taxpayer, you have to pay an additional net income surtax.
Depreciation Recapture Tax
Investors usually write off the depreciation of their property as an expense so long as the rental is still in their portfolio. While this is common, the IRS will collect all that money once the rental is sold.
To illustrate, if you own a rental for 5 years and you write off $6,000 for annual depreciation, you need to pay tax in depreciation recapture of about $30,000 for the property sold.
Depreciation recapture is taxed similarly to your regular income even though you have already owned the rental for more than a year. This is because your taxable income has already been reduced by writing off depreciation as a simple expense for several years.
Also, even if you haven't written off Idaho rental property depreciation as an expense, you may still have to pay a depreciation recapture tax bill. This is calculated based on the IRS' allowable depreciation.
How to Prevent a Tax Hit When Selling a Rental Property Idaho ?
While the taxes property owners have to face when selling rental property can really make an impact on their rental income, there are a few ways to reduce them.
Leverage Section 1031 of the Tax Code
Section 1031 of the tax code, also called the "like-kind" exchange can help defer capital gains taxes.
In Section 1031, the Idaho real estate investor can sell a rental property while buying a replacement property and the taxes can be paid only after the exchange.
For instance, an investor can sell a rental property and buy a condo at the same time, so long as both properties generate rental income. It doesn't have to be exchanging condo to condo for it to be a fair game.
One major drawback of this strategy is that the entire process is time-bound. Rental property owners should find a potential replacement property or like-kind rental 45 days from the sale of their property. The sale of the new property should also close within 180 days.
If a tax return needs to be paid prior to the 180-day period, the sale must close sooner. Missing these deadlines would mean that the real estate investor would have to pay hefty capital gains taxes.
Take Advantage of Section 121: Primary Residence Exclusion
Another way to get a Idaho tax break or reduce the capital gains tax when you sell your rental property is to convert it into a primary residence or personal residence. For an investor to qualify for Section 121, he should have lived in the rental property for 2 years within the 5 years preceding the sale.
Note that the required years of using the rental as a primary residence don't have to be consecutive.
For single real estate investors, they may be granted up to $250,000 tax exclusion from the profit of the sale in the rental market, while married real estate investors that are filing jointly can get a $500,000 tax exclusion.
The exclusion amount when you owe Idaho capital gains tax primarily depends on how long the house was used as a rental instead of a primary residence. However, it is important to note that the portion of the gain that is attributable to depreciation recapture cannot be excluded.
Offset Gains With Losses
Tax loss harvesting is a tax-minimizing tactic that works by pairing the profit or gains from the sale with a huge loss on other real estate investments or stocks.
For example, if a real estate investor gained $80,000 from the sale of a rental and in the same year, lost $105,000 in the stock market, he can sell a portion of the stocks to offset the capital gain.
Options When Selling Rental Property Idaho
You have four major options when selling a Idaho rental property— selling with a tenant to a fellow real estate investor, waiting for the current lease expiration, selling to the tenant, and paying the tenant to leave before listing.
Among all these options, selling to a fellow real estate investor or cash buyer is the fastest since you won't have to end any lease agreement or force your tenant to move.
Still, let's look at all your options so you can weigh which matches your goal in selling.
Sell the Rental With a Tenant to Real Estate Investors
As mentioned, selling a tenant-occupied property is easier with a real estate investor or cash buyer because you can sell as-is. In other words, you can transfer the tenants to them and skip all the repairs needed by the rental.
Here are some more reasons to sell as-is to a real estate investor or cash buyer:
- Faster Sale: The sale can close as fast as seven days because the cash buyer can pay you in cash. They aren't waiting for mortgage approval.
- Less Risky: A sale with a cash buyer is less likely to fall through because the mortgage lender is eliminated from the picture.
- Less Paperwork: Most traditional sales have tons of paperwork because of mortgage loan applications. Since there's no lender involved in a cash sale, there's also significantly less paperwork.
- No Appraisal: The cash buyer won't require you to submit a professional appraisal report. They'll visit your rental property and make an assessment regarding your home's value.
- Flexible Sales Timeline: Whether you want to close in 7 days or in a few months, you will be accommodated. Again, this is because there's no mortgage lender involved.
- No Commission Fees: Commission fees can cover a big chunk of your home sale gains. Good thing, you won't have to pay any commission fees in a cash sale because there's no need for a real estate agent.
- No Closing Costs: Cash buyers cover closing costs and all other fees related to the rental sale so you get the full amount of their offer.
Selling to a Idaho cash buyer is pretty simple. Just go to their website and fill out a form or call them to ask for an offer. They'll then do a home walkthrough to assess the value of your rental property and put in an accurate offer.
Once you've agreed on an offer, they'll furnish you with a contract which they'll send electronically. You'll be given time to review the terms, negotiate, and sign the contract.
After this, you move forward to closing where you get paid in cash and the cash buyer becomes the new owner of your rental.
Wait for the Lease Agreement to Expire
Unless the lease includes an early termination clause or it's a month-to-month lease, your tenant has the right to stay in your rental as long as they are paying rent.
To avoid any Idaho legal issues, you can let the lease expire before selling the rental with the help of real estate agents. Of course, give them a notice regarding the sale so they can search for a new dwelling before their lease expires.
This option is ideal if you want to honor the lease and maintain a great relationship with your soon-to-be ex-tenant. This is also beneficial if the rental prices are high and you want to collect rent before the sale.
However, this isn't recommended if you need to sell property fast to a new owner, especially if there are several months left on the lease period. You would lose capital especially if it's currently a seller's market in your area.
Sell the Rental to Your Tenant (Rent to Own)
Selling to your Idaho tenant is another clean and hassle-free way to sell your rental property. That is if you have a good tenant and they are interested in buying a house eventually.
Think of this as a goodwill gesture that both you and the good tenant would benefit from— they would stay in a property they love and you would not force anyone to leave.
If your existing tenants cannot secure traditional financing, you can always offer seller financing until they are approved for a mortgage. However, seller financing is somehow risky.
Additionally, since they are buying the rental, they may request expensive repairs.
Pay the Tenant to Leave and Sell With a Real Estate Agent
If your tenant is on a fixed-term lease and you really need to sell the rental, you can negotiate with them by paying. Remember that most tenants don't have enough funds to move so if you are forcing them to, it is your due diligence to pay them.
You can cover their moving costs or security deposit on a new rental. You can also pay them the months left on the lease or give them money based on how much you'll profit from the Idaho rental property sale. But most probably, they'll prefer the payment of a security deposit.
Frequently Asked Questions Idaho
Can I Avoid Capital Gains Taxes When Selling an Inherited Investment Property?
Yes. You can avoid paying a significant capital gains tax bill when selling an inherited investment property.
You can take advantage of Section 1301 of the tax code or the like-kind exchange as well as Section 121 or primary residence exclusion. You can also offset the capital gains tax by tax loss harvesting.
What Happens to Depreciation Claims When You Sell a Rental?
When you sell a rental, all the depreciation deduction claims you made over the years will be recaptured.
It works similarly to traditional IRAs where most real estate investors are permitted to deduct contributions on their Idaho tax returns but it becomes taxable when they withdraw.
Final Thoughts: How to Sell Rental Property Idaho
Selling a Idaho rental property can lead to a major tax hit if you aren't aware of how property taxes work, especially capital gain and depreciation recapture.
If you're still confused about the tax implications of your rental sale after reading this blog, better consult with a tax professional or a real estate attorney.
Meanwhile, if you're ready to sell your rental, reach out to us at House Buyer Network. We'll buy your property fast and cover all the closing costs for you!
Fill out our form below or call us at (855) 835-2544 to start selling your rental property!