How to Sell Rental Property In SF Bay Area

Real estate investment is a proven way to make money. It’s often not about if you’ll profit, but how quickly and how much you’ll gain.

Turning your property into a rental is among the top methods to generate passive income and steadily increase your wealth over time. A consistent rental income can significantly supplement your regular earnings, providing financial stability.

Occasionally, unexpected circumstances arise, necessitating the sale of your rental property. This could be due to unforeseen expenses like debt or medical bills, or when property taxes become too burdensome.

But whatever the reason, it can be hard to know if it is the right time to sell a rental property, so we put together a guide for you.

We’ll walk you through the entire process of selling rental property while avoiding as much tax hit as possible so you walk away with more cash from the sale.

How to Sell Rental Property In SF Bay Area

Soaring Home Sales Prices

As per the National Association of Realtors, the median price of property sold in 2012 was only $154,700. But as of June 2022, based on data from the United States Department of Commerce, the average selling price for homes stands at $402,400! Considering this surge, now could be a favorable moment to profit from your investment gains, given the uncertainty surrounding how long real estate prices will remain this high.

signs its time to sell a rental property In SF Bay Area

Housing Demand Vastly Exceeds Supply

In a hot seller’s market, it only takes around 25 days for a home to sit on the market before being sold. You can take advantage of this momentum in real estate, because who knows how long it will last?

Housing Demand Vastly Exceeds Supply In SF Bay Area

Changing Local Market Conditions

Maybe the town where your rental property sits isn’t seeing much job and economic growth anymore. This means it’s tougher to find tenants, and your property is just sitting there empty. It may be a good idea to sell and put your money into a different investment. If you want to know more about what’s happening in the market, you should chat with a local real estate agent.

Rental Property Needs Repairs

If your rental property has big problems like foundation issues and septic system failure, it may make sense to sell it instead of spending more money on it. Many real estate investors want these distressed properties, so you shouldn’t have trouble selling a troublesome property.

Rental Property is Inherited Property

You may have inherited a rental property but you live out of state, or you think you’re not cut out to be a landlord. If this resonates, you can opt to sell the rental property and cash out, allowing you to realize the gains.

You Want to Retire from Being a Landlord

Property management is not for everyone. You may be tired of collecting rent, finding and talking with tenants, and dealing with property upkeep… These are signs that it’s probably time to cash out for other opportunities.

Selling a rental property can be difficult in any market, but here are steps you could take to make it as smooth and stress-free as possible.

Know the Type of Buyer You Want

First things first, you need to identify your target buyer. This will guide your marketing approach, rental pricing, and management decisions.

Are you want to sell to an investor, a first-time buyer, or your current tenant? Each of these potential buyers has unique preferences for the property they seek. So, in order to attract any of them, you have to align with them.

Know the Type of Buyer You Want In SF Bay Area

Arrange a Pre-listing Home Inspection

One of the best ways to get the best price for the rental property that you’re selling is to have a clean bill of health from a professional home inspector. An inspector would take a look at every nook and cranny of your property and recommend the necessary repairs to bring it up to standard.

Decide If It Is Worthwhile To Do Repairs or Sell As-Is In SF Bay Area

Decide If It Is Worthwhile To Do Repairs or Sell As-Is

A nice, updated, and modern property listed for sale in the real estate market typically gets a higher price than one that’s old and in bad shape. Some new real estate investors want a property they can rent out right away.

This choice really comes down to whether you have the time, energy, or money to spend upfront on fixing things up, without knowing for sure if you’ll make that money back when you sell.

If your rental property has had a lot of problems from neglect, maybe because of careless tenants, it might be smarter financially to sell it as-is to a real estate investor and let them handle it.

Real estate investors usually pay in cash. They can finalize a sale quickly because they don’t have to wait for a mortgage approval like traditional buyers do.

Do a Lien Search

An escrow officer can help you with a title search to find out if your rental property has any other encumbrances you may not know about so you can take care of it ahead of time, ensuring the real estate transaction goes as smoothly as possible.

Inform Your Tenant about Your Intention of Selling the Property

You need to let your renters know you want to sell so they have enough time to find a new place.

You could offer them a bonus to help them move out. But make sure you know the rules in your state, especially with COVID-19 affecting when you can ask them to leave.

Inform Your Tenant about Your Intention of Selling the Property In  SF Bay Area

Study the Tax Implications of Selling a Rental Property

When you sell a rental property or any other real estate assets, tax payments should be made such as depreciation recapture tax, or any remaining capital gains tax.

Depreciation Recapture Tax

Property investors often use depreciation to lower their taxes while owning real estate. But when they sell rental properties, they have to pay back that depreciation, taxed at their tax bracket, possibly up to 25%.

Capital Gains Taxes in SF Bay Area

Capital Gains Taxes

If you had the rental place for less than a year, the money you earn when you sell it is short-term capital gains, and you pay tax on it based on your tax group. That means you have to give the government between 10% and 37%.

But if you had the place for more than a year, the money is long-term capital gains. You still pay capital gains tax, but it’s lower: 15% for couples with taxable income between $80,800 and $501,600, and 20% for couples making more than $501,600.

If your taxable income is below $80,800 annually, then you wouldn’t need to pay capital gains tax.

Even if you do not fit the above criteria, there are still workarounds in avoiding hefty capital gains taxes, which we will discuss below.

Illustrative Example of Tax Consequences when Selling a Rental Property

Suppose you bought a rental property for $80,000 and sold it today for $120,000 after holding it for five years. During that time, you claimed $10,000 in depreciation.
Let’s say you’re in the highest tax bracket, so a 25% depreciation recapture tax and a 20% capital gains tax apply:
Depreciation recapture tax: $2,500 (25% of $10,000)
Capital gains tax: $8,000 (($120,000 – $80,000) x 20%)
In total, your tax bill comes to $10,500.
Take note though, tax rules may vary depending on your personal situation, so after reading this guide, it would still be better to consult a tax professional or a real estate attorney.

Take Advantage of the 1031 Tax Deferred Exchange on an Investment Property

A 1031 exchange takes its name from Section 1031 of the Internal Revenue Code, and is basically a tax break. You are able to defer capital gains taxes when you sell rental property, but it is subject to the following rules:

  • The real estate to be acquired must be for business or investment
  • You must use the proceeds to purchase a replacement property of equivalent or higher value
  • After closing on the sale of the previous property, you have up to 45 days to identify a replacement property
  • After closing on the sale of the previous property, you have up to 180 days to close the deal on the replacement property

There are lots of benefits of a 1031 exchange, foremost among them is an opportunity to invest in a real estate portfolio elsewhere.

For example, if you have a single-family rental property in an expensive housing market such as San Francisco (median home price = $1,400,000), you can proceed to sell it and use the funds to purchase multiple investment properties in another state, say, Utah (median home price = $279,100).

Consider Living in Your Rental Property Prior to Selling to Avoid Capital Gains Tax

When selling your primary residence, you wouldn’t need to pay capital gains tax on a profit of up to $500,000 when filing with your spouse; or, if filing singly, you can have a tax shield of up to $250,000.

However, in order for this benefit to be available to you, you must pass the Internal Revenue Service (IRS) ownership test per the Taxpayer’s Relief Act of 1997:

  • You must own the rental home for at least two years
  • The 2-in-5 year rule: meaning you must live in the property for two years or more in the five years you have owned it prior to selling the property

From a tax savings perspective, it is more beneficial to sell it as a personal residence than just unloading it as a rental property.

A little reminder though, selling your personal residence does not qualify you for a 1031 deferred exchange.

Evaluate the Property for Possible Tax-Deductible Repairs

Fixing up your property not just boosts its appeal to buyers but also offers potential tax breaks. But remember, these fixes are only deductible if they maintain the property’s functionality, not if they increase its value. Chat with a tax expert for further details on deductible repairs.

Use Tax Harvesting to Offset the Capital Gains

Not every property in an investor’s collection turns out successful. Occasionally, you might need to accept a loss if the investment property isn’t meeting expectations.

However, you can utilize this loss to balance out the profits from another property you’re selling in the same tax year. This practice is known as tax harvesting.

For instance, suppose you own a rental property with a negative equity of $35,000 and another property with a $60,000 gain. The loss will be deducted from the gain, leaving you with only $25,000 in taxable capital gain.

Selling a tenant occupied property is much easier if you have an early termination clause in the lease agreement, you would just follow the procedure outlined in the next section.

The current lease can be terminated on the following grounds:

  • Terms of the lease were not honored by the tenant
  • Property is grossly neglected by the tenant
  • Landlord has been repeatedly unable to collect rent
  • Landlord wants to sell the property

However, even if you don’t have an early termination clause in your contract, you will still be able to sell your tenant occupied property, you just have to do any of the following:

Wait for Your Tenant’s Lease Expiration

If your renter sticks to the rules and pays rent promptly, they’re entitled to stay for the whole lease term. You must respect the contract and hold onto the property until the lease ends before selling. At least you’re earning rental revenue while you wait.

Sell Property to Your Existing Tenant

Before listing your rental property for sale, why not offer it to your current tenant?

Your tenant already enjoys living in your property, so they might be interested in purchasing it instead of moving. This saves them the trouble of relocating and allows you to profit from your real estate investment without involving real estate agents and their fees.

If your tenant can’t secure a traditional mortgage, you could provide seller financing until they’re able to. This benefits you as the seller because even in a market favoring buyers, you can still sell at your desired price.

Capital Gains Taxes in SF Bay Area

Sell Your Rental Property with an Active Lease

Many landlords prefer rental properties that generate consistent income. If you’re ready to sell and pass the responsibility to a new owner, you have that option. The new owner can choose to let the current lease
end or renew it.

Offer your Tenant to Vacate

You can also incentivize your tenant to vacate the premises when you are ready to sell so it will be a win for everyone. You can compute the incentive based on the following:

  • Moving cost
  • Rent differential – For example, there is a nearby property your tenant could move into, but the rent is higher. You could offer to pay for the difference for the remainder of their current lease
  • Security deposit – Moving to a new property would mean putting up a security deposit equivalent to a month’s rent. You could help out your tenant by offering to pay this for them
  • Lump sum – If a decent profit from selling your rental is on the horizon, you can offer your tenants a larger sum to encourage them to move

After resolving tax issues and when your rental property is empty or you’ve reached a positive agreement with your tenant, selling it is akin to selling a regular house. Depending on its state, you can choose among three primary methods to sell a rental property.

If the rental place is in good condition, work with agents who handle showing, bargaining, and finalizing deals for potential buyers. They’ll give tips on sprucing up your property.

This convenience comes with costs like agent fees, repairs as suggested, and other expenses in selling a home.

Sell your rental property yourself (For Sale by Owner) if you have sufficient time and energy to invest in marketing your property. You will be responsible for the staging, showing, negotiating, and closing. Lack the experience needed to garner a worthwhile price?…

In certain areas like SF Bay Area, it’s mandatory for the executor to submit the will within 30 days of someone passing away to start the probate process. But generally, there is no time limit in initiating the proceedings. However, waiting to file doesn’t offer any advantages, so it’s smart to submit the probate petition promptly.

Sell your property to a real estate investor for convenience and less stress. One big advantage of selling to an investor is you can sell your property without much effort. Investors usually seek properties in their current condition, so you don’t need to worry about fixing it up or making it look good. You don’t even need to arrange a professional inspection! The only thing to consider is selling at a lower price since investors include potential repair costs in their offer. Expect to sell below market value.

However, you benefit from a quick sale and leave with cash in hand, so it depends on what’s important to you in your property sale.

You have options to make money from your investment without paying a big tax bill.
You can: sell it as your main home; do a 1031 trade; use tax cuts; or do tax-deductible fixes. Even then, selling a rental can be tough, and there’s a lot to figure out.

At We Buy Houses in SF Bay Area, we make selling easy. We buy all kinds of properties–even rentals in bad shape.

Ready to sell? Fill out the form below for a quick, no-obligation offer! We can close in just 7 days, and we pay all closing costs!
Want to chat? Call us at (408) 557-7554. We’re here to help!

SF Bay Area Resources

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The Easiest Way To Sell Your House Fast In SF Bay Area

You’re in the driver’s seat when you accept our cash offer for your house. We make the process simple, fast, and easy to follow when working with us. You have no obligation to accept our cash offer for your home when contacting us for a fair cash offer for your home. No matter the reason you want to sell your house, we want to buy your home as is. Remember that you get many benefits that include no real estate agent commissions, no cleaning, no improvements, and no stress. Our cash offer for your as-is house assures you of fast cash payment at closing with a reputable Title company. You can count on our company to give you a fair cash offer for your home! If you’re still thinking, “I need to sell my house fast”, calling us could be your best decision all day. 🙂

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Gagan Saini

Author: Saini

My name is Saini, and I founded the We Buy Houses in SF Bay Area team with years of experience in the real estate industry. I have assisted numerous sellers in selling their homes quickly, “AS-IS”, and for a fair price.

He’s been featured in multiple publications including Yahoo Finance, GoBankingRates, LegalZoom, The Mortgage Report, Apartment Therapy, US News and World Report, and SuperMoney among others.

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