The Main Four Reasons You Should Sell the Property

Usually, the real estate investors buy properties for the purpose of rental income. They want to earn a good amount from the rent. In that manner, the investors do not want to sell their property. The real estate investors love to buy properties and love to enjoy its income.

The real estate investors make their portfolio as property managers and renting out their properties. But, it is sometimes vital for them to diversify their portfolios. So, in order to make changes in your portfolio, you have to sell some part of your property. Maybe because you are not earning much interest from that part or maybe because you can earn a good amount by selling the property which you cannot earn by the monthly interest. Selling property can give a good impact on your portfolio. This would be the best decision you can take maybe. So, always try to do be intellectual in earning. Do something that would be in your interest whether selling the property or renting out.

The key is you should know all the strategies and tactics of selling the property. You can take a bad decision at a bad time. So, the significant point is you should know the limit, a cutoff point, and the crucial parts.

In this article, I have mentioned the main four reasons you should sell the property.

1. Keep in Mind that You Want to Sell.

The one important point is that you want to sell your property and you are also planning for it.  Zero or less planning can lead your deal to a big fiasco. Keep patience and make proper adjustments. Any impulsiveness in making a decision or in the planning phase would be a big mistake. As a real estate investor, your priorities should be calmness and being a strategic one. Make the plan first and then try to follow each and every step according to the plan. When you grasp your plan, there is a very low chance to fall. Every successful investor starts his journey with full-fledged planning. You can even change your plan at any phase according to the market research. Always use a proactive approach and make your self aware with the market real estate trends.

2. The Property Which Gives You Negative Cash Flow.

When you make the plan, that plan should not be rigid. As I mentioned above, you should aware of the whole scenario and plan so that you can make some obvious changes in your plan. Cash flow is a major factor in your life. It changes with the minor change in your expenses.  So, any rental income that gives you negative cash flow is not for your use. The property that cannot afford your expenses makes no sense to be yours. When you make strategies, keep in mind the property that gives you consistent negative cash flow. You should sell that property first. It is not compulsory to sell it immediately but this would be your priority.

3. Troubled Property.

Is there your any property that is stuck? Is there any property that is making continuous trouble for you? Any trouble regarding neighborhood, electricity, flood, non-commercial place, termite or any other issue. Get rid of that property first. These types of properties can give you a tough time while renting out. So, the best decision is to sell that property.

4. Planning a New Investment.

Is it like you are planning something different? Do you want to do something new? Then, what is the hurdle? It is good to move to become diversified. What is stopping you? The investment? No more hitches. You can invest in your new business by selling your property. Yes, for the betterment of future you have to sell your property. Your property is here to hold you, even you want to invest in any new business or you need some money for any crisis. You can sell it.

Rental Property Depreciation

Most of the times, investing in real estate business can be very profitable and cash generating. The real estate investments become a stable source of constant income with a very little to worry about. The profit margin gradually increases as the investor reaches equity. In ideal situations the value of the property rises with time. Along with all other benefits there are tax benefits as well. The tax liability can be lowered if the tax payments and rental expensed are deducted from the rental incomes. Depreciation is the process of lowering the cost of a rental property while simultaneously upgrading the property. Depreciation distributes the deduction over the life of the property instead of a single large yearly payment.

Properties that are depreciable

A property can be depreciated if it meets certain requirements. If the property is owned by an investor or it is being used in a business or for generating income by the investor, the property can be depreciated. If the property has a determinable life and one can judge its lifespan, then it can be depreciated. The same case applies even if the property can last more than a year. But if the property meets all the requirements it cannot be depreciated. One cannot depreciate the costs of clearing, planting and landscaping etc.

Beginning and ending of depreciation

Depreciation may begin as soon as the property is available for providing service or can be now used as a rental. The depreciation process can continue until the entire cost is deducted or the property is retired from service before its cost is deducted. Even if the purpose of the property is changed it is no more depreciable.

Method of depreciation

The property decides the amount that is deducted each year. Certain accounting techniqies are applied to calculate the amount. A qualified tax accounted should be consulted when the depreciation is being calculated.

Determining the basis of the property

The cost of the property is its basis to calculate the depreciation. The amount that was paid as cash or mortgage can also form the basis of the property. All types of costs are included in the basis such as the settlements fees, closing costs and the transfer fees etc. Any insurance availed at the time of purchasing the property is also included.  

Separating the cost of land and property

As already mentioned that the cost of the land cannot be depreciated. The value of the land and the property should be accurately calculated so that the correct amount to be depreciated can also be calculated. To determine the value of the property the fair market value should be checked and the cost of land should be deducted from the total cost.

Depreciation reducing tax liability

When we rent a real estate property the rental income is reported. When the annual tax return is filed, the net gain or loss is listed in the form. The depreciation is also a part of the expenses that are listed on the schedule E, so the depreciation amount will effectively reduce the tax liability of the year.

Conclusion

To sum up, anyone who enters the real estate business can get advantage of the depreciation. It allows the buyer to spread the cost of buying the property is spread across a number of years. If the property is depreciated and sold after that the seller will have to pay the tax on the gain through depreciation recapture tax. The rental property laws are complicated and change over time so the investor should try to work with a qualified accountant so that he may not face any unwanted situation. 

1031 Exchange and Real Estate Investment

The 1031 exchange rule was not there at the time of Benjamin Franklin. This is the reason that he believed in the inevitability death and taxes. While the death is certain, 1031 exchange rule can surely save you from taxes if you are doing real estate business.

The IRS

According to the Internal Revenue Code, Title 26, Section 1031, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment."

In this scenario, the like-kind property actually means other real estate. It doesn’t really mean that a deal must be based on land-for-land or office-for-office exchange.

It also means that if your property exchange qualifies for the 1031 exchange rule, you will either have no or limited tax to pay at the time of exchange. Good thing is that you can do 1031 for as many times as you get provided that you qualify for it. You may also be able to get profit on each swap. However, you will have to pay taxes if you are selling the property for cash.

Keep swapping

It means that you can actually sell an investment land to get an office rental property. The difference of price is going to be like a profit for the one giving high valued real estate. However, there are a few things that you need to keep in mind.

• Investor must be selling the investment property. This rule doesn’t apply on residential properties.
• The exchange should of the properties of like kind. It means that any other real estate can do.
• The exchange should be done by meeting certain deadlines and time frames.

Things you cannot do

There are certain restrictions for certain properties and scenarios here. There cannot be a 1031 exchange for:

• Properties that are held for resale and stocks in trade
• Bonds, notes and stocks
• Evidence of indebtedness
• Certificates of trusts

Government as your partner

If your property qualified for a 1031 exchange and you have taken care of all of the deadlines and time frames too, then you can grow your holdings by making government your partner. With an increase in the value of properties in business, you can trade for high valued rentals while avoiding taxes. This way, you will be able to plow the money into the next transaction instead of paying taxes from it.