If you are a homeowner who rents out your property to help cover the mortgage on your primary residence, you may be interested in selling the rental property and using the proceeds to pay off your mortgage.
This can be a smart financial move, but it is important to weigh all of the pros and cons before taking action. In this blog post, we will discuss some of the key factors to consider when making a decision about whether or not to sell a rental property.
What Happens If You Sell A Rental Property?
When you sell a rental property, you will be required to pay capital gains tax on any profit that you make from the sale. Capital gains tax is a tax on the profit that you earn from the sale of an asset, such as a stock, bond, or piece of real estate. The capital gains tax rate is 20% for most taxpayers. However, there are some exceptions to this rule. For example, if you are in the 10% or 15% tax bracket, your capital gains tax rate will be 0%.
If you decide to sell your rental property and use the proceeds to pay off your primary residence mortgage, you may also be subject to state and local taxes. Be sure to consult with a tax advisor to determine what, if any, taxes you will owe on the sale of your property.
Pros And Cons Of Selling A Rental Property
Pros Of Selling A Rental Property?
There are a number of potential benefits to selling a rental property and using the proceeds to pay off your primary residence mortgage.
- It can help you to save money on interest payments. When you have a mortgage on your primary residence, you are typically required to make monthly interest payments. If you sell your rental property and use the proceeds to pay off your mortgage, you will no longer be required to make these interest payments. This can free up a significant amount of money each month that can be used for other purposes.
- It can help you to reduce your overall debt burden. If you are carrying a mortgage on both your primary residence and your rental property, selling the rental property can help you to focus on paying down the mortgage on your primary residence. This can lead to a faster payoff of your mortgage and a reduction in the amount of interest that you will pay over the life of the loan.
What Are The Cons Of Selling A Rental Property?
There are some potential drawbacks to selling a rental property as well.
- It is important to remember that you will be required to pay capital gains tax on any profit that you earn from the sale. This can eat into your profits and leave you with less money than you anticipated. Additionally, if you sell your rental property and use the proceeds to pay off your primary residence mortgage, you will no longer have a source of income from rent payments. This could make it more difficult to cover your mortgage payments if your primary source of income is reduced or eliminated.
- It can be time-consuming and expensive to find a new tenant. If you sell your rental property and are not able to find a new tenant right away, you may have to cover the mortgage payments yourself until a new tenant is found. Additionally, there may be some upfront costs associated with getting the property ready for a new tenant, such as painting and repairs.
When Should I Sell My Rental Property?
The decision of whether or not to sell a property is a personal one that depends on your individual financial situation. However, there are some general guidelines that you can follow when making a decision about whether or not to sell your rental property.
- Consult with a tax advisor to determine what the tax implications would be.
- Consider the current market value of your property and compare it to the outstanding balance on your mortgage. If the market value of your property is significantly higher than the balance on your mortgage, selling the property could be a good financial move. However, if the market value of your property is only slightly higher than the balance on your mortgage, you may want to keep the property and continue to collect rent payments.
- If you are in a good financial position and can afford to make the mortgage payments on your primary residence without the income from rent payments, selling the property could be a good option. However, if you are struggling to make ends meet, it may be better to keep the property and continue to collect rent payments.
Is Sale Of Rental Property Ordinary Income?
The sale of a rental property is considered to be ordinary income. This means that any profits that you earn from the sale will be subject to capital gains tax. Even if you use the proceeds to pay off the mortgage on your primary residence because the IRS considers the sale of a rental property to be a business transaction, you will still be required to pay taxes on any profits that you earn.
You may avoid paying capital gains if you have lived in the property for two years as your primary residence within five years before selling the property. However, it is always best to consult with a tax advisor to determine what the tax implications would be before making a decision to sell your rental property.
Avoid Capital Gains Tax On Rental Property
If you are considering selling your rental property, there are some things that you can do to avoid paying capital gains tax on the sale.
- Exchange the property for another investment property. This is known as a 1031 exchange and it allows you to defer paying capital gains tax on the sale of the property.
- Sell the property to a qualified buyer who will use it as their primary residence. If you sell the property to a qualified buyer, you may be eligible for the exclusion from capital gains tax on the sale of up to $250,000 for an individual or $500,000 for a married couple.
Why Should You Sell Your Rental Property to Colorado Cash Buyers?
Are you tired of dealing with tenants or do you want to pay off your mortgage? You may want to consider selling your rental property to us. Colorado Cash Buyers is a cash home buyer in Colorado who are interested in buying properties in any condition. We will pay cash for your property and we can close on the sale quickly, sometimes in as little as 7-28 days. Contact us today to learn more about our services and to receive a free no obligation offer on your property.