When it’s time to sell an investment property, a good exit strategy is the key to satisfying your personal needs and minimizing tax consequences. To do so you should answer the following questions.
- Do you need a lump sum of cash?
- Do you need a lump sum of cash and cash flow?
- Do you want to expand your investment portfolio?
Lump sums of cash typically trigger capital gains tax. If your cash needs require such a transaction, plan to pay the taxes and use the remaining cash to pay bills, invest, etc.
But if you need cash and cash flow offer seller financing, which provides a nice way to receive the cash benefits and removes management hassles of ownership. Additionally, your accountant and real estate broker may be able to help you manage much or all of the capital gain by how you structure the deal. Seller financing will increase your yield (return on investment) through the interest you earn by carrying back a note. Reasonable sized down-payments help reduce your risk of income loss should the buyer default.
Expand your investment portfolio and defer the taxable gain to some future date. The IRC 1031 or “Starker” Exchange allows you to defer the taxable gain by exchanging your equity into another investment property of equal or greater value. Investors wishing to grow their portfolios often choose this method. But exchanging requires you identify another property within 45 days after the sale of your relinquished property. If finding another property locally is problematic consider expanding your search area.