Time to sell my rental property?

The big question.

A current investor asked me, "when should I sell one of my homes and cash out?"
It all depends. In theory, never. When you sell your investment property, all of your investment profit, or gain, is taxable. Not that paying tax is a bad thing, because you will only pay tax on profit, therefore you are ahead of the game. However, if you have a gain of $100,000, why do you want to lose $15,000 or more to taxes, not to mention the monthly income that a property can provide. Rather, consider a tax deferred exchange if you want to liquidate the property. This kind of treatment allows you to trade one property for another, and defer the tax that would be due to a later date.

Ok, so you need cash now and you don't want to pay the tax, so what options do you have?
First, one of the easiest ways is to finance or re-finance the property and pull cash out. For example, if your property is worth $200,000 and you currently owe $100,000, one can get a loan for up to 80% of the value or $160,000 putting $60,000 in your pocket. With this option one gets the cash needed, equity is still in the property, and the income stream should easily take care of the mortgage. This money that is taken out of the loan is not taxed.

As always, consult your tax advisor for specifics on your situation since all situations are different. This is just a guide to let you know there are options avaiable for ceritan situations.

I will talk more about tax deferred exchanges next time. Stay tuned!

Invest away!

Paul