As a real estate investor, you’ve made your livelihood by building equity in your properties.
But when you’ve maxed out equity or want to capitalize on your property’s appreciation, it’s time to sell.
Selling a rental property like Serviced Apartments in Tay Ho (West Lake) comes with a few more challenges than selling a personal residence. For one, you must consider your tenants and enlist their cooperation to facilitate a successful sale.
Importantly, tenant cooperation can enable you to find a buyer interested in taking on your tenancies, which makes the sale worth much more. However, you’ll need to work around tenant schedules for showings and repairs, which can be difficult.
If you’re aiming to sell to another investor, here are the three legal steps you must complete.
Step 1: Transfer the Property Title
The first step in selling a rental property is to transfer the property title.
To transfer a title, you must first verify that there aren’t any liens on your property. A mortgage lien is a legal claim against your property by your lender or creditor, which exists until you pay off the debt on the property.
This step is important because a buyer will always conduct a property lien search before moving forward with the sale. They’ll check to see if your property has “clear title,” or no active liens. If it doesn’t, the sale cannot proceed legally.
If your property does have clear title, the sale can proceed. There are five steps to consider when transferring a title:
- Locate the deed. The most common type of deed is a general warranty deed. You’ll need this document to transfer the property to the new buyer.
- Hire an accredited real estate attorney. Your attorney prepares the deed for the sale.
- Review the deed. Make sure both your information and the buyer’s are correct on the document.
- Sign the deed. You’ll need to take the deed to a public notary and sign it in front of them.
- File the deed. Signed deeds should be filed with the local county records office. You’ll usually have to pay certain fees and taxes to complete this final step.
After completing these five steps, your property title is officially transferred to the new buyer.
Step 2: Transfer Existing Leases
Step two of selling a rental property concerns your current tenants.
Your tenants have a few options. They can choose to either move out at the end of the lease term, sign/negotiate contracts, or continue their existing contracts under the new buyer.
If they choose the last option, you’ll need to transfer your tenants’ existing leases to the new buyer. In addition to the existing, signed rental agreements, you’ll also need:
- Security deposit information (bank account numbers, interest rates, etc.)
- Property tax bills
- Seller tax returns
- Any insurance claims
- History of all repairs, renovations, and improvements
- Utility billing information
- HOA documentation
Provide these documents to the buyer, who will review them during the property title transfer. The buyer will become the new owner under your current tenants’ rental agreements, and your tenants will maintain their current rental rates until the end of the lease term.
Make sure to communicate with your tenants at all stages in this process. Notify them at least 10 days before the transfer in writing and provide the new owner’s name and contact information. If their security deposits have moved, provide the new location as well.
Step 3: Calculate Depreciation and Recapture
The last step in any rental property sale is calculating depreciation.
Here’s how it works. As you know, the IRS assumes that buildings and other types of property lose value over time because of normal wear and tear. This is called depreciation, and it enabled you to take depreciation deductions on your property each tax season.
But as any successful real estate investor knows, most properties actually appreciate over time due to the improvements and renovations you made. Since depreciation was still assumed and lowered your taxes, the IRS wants to reclaim some of the tax you avoided. This is called recapture, which is taxed at a slightly higher capital gains rate (25%).
There are a few ways to avoid paying recapture tax if you’re tax savvy. For instance, you can make a tenant in common 1031 exchange to defer your capital gains tax, or you can live in your property for several years before selling it. However, you should seek professional tax advice before pursuing either of these options.
Sold rental property depreciation is the final and most feared step in the process. However, by understanding how your sale will be taxed, you can pass this step with ease.
Conclusion
Selling a rental property involves many legal, tax, and administrative steps that simply aren’t necessary in a primary home sale. However, with a careful understanding of each step in the process, you can make your rental property sale as efficient as possible.
