When to Sell Real Estate

Many individuals have done well by investing in real estate over the years. Some of their investments have been in vacant land and others in rental properties. But there often comes a point in time when real estate, particularly residential rentals, is too demanding an investment compared to other assets such as stocks and bonds. So what is the best way to transfer the responsibilities of managing or even totally getting this asset out of your portfolio?
With income properties, you could just hire a property manager. But sometimes this isn’t cost efficient or maybe you’ve had enough and want out.
There are several ways to remove real estate from your portfolio and perhaps increase your income at the same time.

• An outright sale is the simplest. Tax consequences, however, can take up to 15% of your long-term gains (plus state tax and recapture tax if it applies).
• An installment sale can ease the tax bite, but you will have to wait longer to get your money.
• A 1031 exchange to a less demanding or higher income producing property could simplify your life and defer income taxes. For example, selling your apartment building and using the equity to buy a McDonald’s location results in a less demanding property as the commercial tenant usually takes care of all property responsibilities.
• If you also want to help a charity, you could put the property into a charitable remainder trust that would sell the real estate without paying capital gains tax (plus pay you an income as long as you live and even stretch it to the next generation).
• You could use a “private annuity” if you desire to transfer the property to your heirs and want to immediately remove it from your estate.

Another alternative would be to get a new mortgage to free up cash that you could put in other investments for further portfolio diversification.

Before you make any changes though, you might want to take some factors into consideration. For instance, what does your family think about this? Do your children expect to get or stay involved with the real estate? And suppose you’re married. Would your spouse have the ability or even want to take care of real estate if you died? If not, you might end up leaving him or her with a bundle of problems and responsibilities.

Coming up with the appropriate strategy to remove real estate from a portfolio needs to be approached with a coordinated effort that addresses your financial, family, legal, and tax situation.

To review options that make sense, return the enclosed coupon for more information.