Just like other real estate investors, you may have bought an investment property in the past in the hopes of boosting your total returns and overall wealth. But change is inevitable and you may have reached that point in your life where you want to invest time and resources into another venture. Perhaps you also ask the question: “should I sell my rental property in 2021?”
Most property owners look at housing market trends to help them determine when to sell rental property. Before selling, you also have to look at changes in the marketplaces, current tenants, taxes and repairs.
Should I Sell My Investment Property?
Like many other property owners, you also want to find indicators that selling your rental property now is a good idea. Many factors affect your decision to sell your investment property. Your financial circumstances, time limitations, income streak, present and future aspirations and even your interests play an important role in your decision to sell.
Take a look at these factors below to help you decide:
Your overall lifestyle goals.
You remember the first time you initially bought the property, right? Now ask yourself these questions:
- Does being a landlord interest you or are you tired of midnight calls and complaints from tenants?
- Are you making annual money from the investment or do you think it will be worth selling?
- Do you think the payoff isn’t worth the time you invest in managing the rental property?
- What do you think should be your annual and long-term rates of ROI?
These questions will help you decide if selling the property should be your next big step.
Think about taxes.
After selling an investment property, the tax will come from your capital gain and recapture. The capital gain will be based on your selling price minus your selling costs. This already includes real estate commission, any legal fees incurred and other incidentals. It is also important to deduct the adjusted cost base of your property (ABC) especially when you are selling rental property at a loss. This means whatever renovations or major improvements were added to increase the selling price of the property for tax purposes.
At present, 50 percent of your capital gain remains taxable, which will be added to whatever income you gain during the year that the property is sold. If the property is sold during the year when your income is lower, you will also have lesser tax to pay and vice versa.
All gains from the sale of rental property IRS taxes will apply as part of the capital gains tax rate. However, any loss on the sale of your rental property is considered an ordinary loss and the IRS will typically allow you to carry forward a loss especially if you don’t have the gains to offset such loss by the end of the year. Then you are eligible to claim $3000 worth of losses from your other income on your tax return.
Reviewing asset allocation.
Keeping a smaller percentage of your portfolio in real estate is ideal. Seasoned investors would usually advise you not to put all your eggs in one investment basket. When the market goes up, your returns could be potentially higher but it could also be your downfall if the market declines.
How much do you need for your retirement?
Calculations may vary but if you are not expecting any changes in your lifestyle, you can use your current expenses as your baseline for planning purposes. Before asking “should I sell my rental property in 2021”, find out what your lifestyle goals are. Do you have plans to travel? Can you see yourself spending several months in a warmer climate and when you do, who will take care of your rental property?
Itemizing your retirement income streams is also ideal. This gives you an idea if you still need your rental property income. All your other large investments may be enough to bring you a passive income stream. It may turn out that you no longer need the income you gain from your rental property to live comfortably.
In another view, depending on your chosen retirement lifestyle, you may need the capital out of the property you sell. Real estate prices are at an all-time high and you may think that now is an ideal time for you to cash in and enjoy the fruits of your hard work.
Investing your proceeds.
Just because you are selling your rental property doesn’t mean you cannot continue investing in real estate. There are a lot of ways that you can do this without owning rental properties. For instance, you can buy units of a real estate investment trust (REIT) from a company that owns, manages or even finance real estate to generate income. This is modelled after mutual funds and this is why investors can earn dividends from real estate investments even without buying, managing or financing any property.
When Is the Best Time To Sell My Investment Property?
The restrictions due to the recent pandemic have slowly eased. The question now is what the real estate market will look like in the aftermath. Weighing your options is your best course because once the market settles down, it is more likely that the selling prices will also shoot up. Rental property rates continue to rise so holding on to your property is a smart move, especially if it generates passive income. However, if you decide to sell, now might be the best time to answer your question: “should I sell my rental property in 2021?” and get a good price.
Consider the basics when deciding to sell your property. Ask yourself the following questions:
- Are you enjoying passive income from your rental properties?
- Do you think you will be happier, enjoy more time or earn more capital to invest if you sell now?
- Is your property located in a popular neighbourhood?
Bear in mind that if you made the best investment, you are in a good position if you want to sell now or choose to wait. The status of the market is irrelevant if your investment property is solid.
Bottomline
Savvy investors always recommend that before you enter into any investment, always have an exit strategy in mind. Recognizing whether the property is performing well is essential so you won’t waste time on a property that has outlived its worth.
If you need to sell your property, hire experts to help weigh the pros and cons. You can also take note of the above info to help you decide if it’s time to let go of your rental property and invest your hard-earned money into an investment that suits your lifestyle.
