Whether you are building equity in your rental through handsome upgrades, a hefty rent hike, or one monthly payment at a time, the hope is that over time your property will become more and more valuable. It’s always tempting to think about how much money you could make by cashing out a rental unit, especially if the market where you live is heating up.
Remember, selling a home usually requires an investment of time and money. Your CPA or other financial advisor can help to give you the hard numbers if you decide to sell. Here are just some of the costs that may cut into your profits.
Agent Costs
Typically, the seller pays all agent costs. This is usually six percent of the purchase price, with three percent for the seller’s agent and three percent for the buyer’s agent. These numbers may vary slightly depending upon your locale.
Closing Costs
These costs are market dependent. Typically, the buyers are responsible for their own closing costs. However, in a slower market, or when dealing with a first-time buyer, the seller may be pick up the closing costs to sweeten the deal. Plan on around three percent for closing costs.
Required Fees
Don’t forget to account for many required fees that may be necessary in your locale. Set aside one percent of the purchase price for various fees where you live.
Overall Sales Cost
A good rule of thumb is to set aside about ten percent of your selling price to cover overall costs and fees. This number does not include any tax obligation.
IRS Obligations
You will need to pay taxes on the sale of your property.
Once you take into account the cost to sell your house, don’t forget that the income you make will be taxable as allowable by law.
Capital Gains
This is the amount that you pay on your profit. If you have personally lived in the house for part of the time that you have owned the house, you will be able to write off part of the profit. For example, if you have lived in the house for 2 out of 5 years, then you can protect yourself from paying taxes on up to $250,000 worth of profit (or twice that amount if you are married filing jointly). This tax is a federal tax. Depending upon your state, there may be additional rules and requirements. There are different requirements for members of the military as well. See IRS Publication 523 for additional details.
Depreciation
This federal tax is assessed based upon the formula of your house value minus the land value, divided by 27.5. This must be repaid at 25 percent when you sell your home as a rental.
Repairs or Improvements
Along the way, you have inevitably put money into your rental property for repairs or improvements. Be sure to consider how much money you have put into the home, and think about whether your profits will help you recoup these expenses.
Carrying Costs to Sell the House
Selling a property is expensive. In order to get top dollar, you will probably need to make some improvements that you would not necessarily need to do otherwise. In addition, if you leave the property vacant during the process of selling you will lose rental income.
After you consider all of the hidden costs of selling your rental property, you should have a better idea of whether this sale will be the windfall you were expecting. In some cases, you may decide to keep using the property as a rental, and let someone else continue to contribute to your mortgage.
