Selling your rental property at a loss may feel like a stressful transaction. Actually, a loss means at least some sort of tax event that will work in your favor so it may not be as stressful as you think. Here we will cover everything about selling your rental property at a loss.
5 Considerations for Selling a Rental Property at a Loss
The rental property business is a hit or a miss. Even if you do everything right to make sure your business is sustainable and successful, sometimes the timing just isn’t good.
You may feel blue and heartbroken, but the rental property market is a volatile and unpredictable gamble. The least you can do is figure out how to minimize your losses.
Even if it isn’t about your business going down and under and you’re just looking for ways to sell your properties that have lost their value in a crashing economy, it helps to know how to sell your rental properties at a loss.
You can consider selling to a house investor that might be able to close quicker (but lower valuation) or you might want to consider maximizing value by using an agent.
Don’t listen to the people who advise you that selling a rental property will result in nothing but losses. Only half of that statement is true.
You may face a loss, but it doesn’t have to be as hefty as you may think.
You can always be smart about it and use it as a benefit.
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What Does It Mean to Sell at a Loss?
It isn’t very easy to realize that your rental property business is not doing well. The biggest indicator for this is, of course, when people aren’t renting out your properties, and you’re facing monetary loss.
The real estate market is always in flux around the world, and the prices often shift very quickly. It always helps to measure how the prices are changing drastically around the globe and see what the current market is like.
Whether it’s the type of property you’re selling, the changing demands of the kind of residence that people are seeking, or the unstable economy, your rental business could face a death blow any day.
And if it does, there are always ways you can minimize or capitalize on the unavoidable losses.
See Related: Real Estate Due Diligence Checklist
5 Considerations for Selling a Rental Property at a Loss
If your property is underperforming, you may be left with no choice but to sell it. But selling your rental property at a loss can also come with some unprecedented benefits.
Take rental real estate loss allowance, for example. In the US, if you own rental properties, the federal tax deduction is available to you as a taxpayer. The tax code deducts up to $25,000 of real estate loss per annum.
So, if you’re selling a rental property at a loss, you must look through the cost-benefit analysis from all angles. It may seem like your ship is sinking, but that doesn’t mean you can’t minimize your losses.
Here are seven aspects of selling a rental property at a loss that you should consider when making the call:
Figure Out Your Cost Basis (In Advance)
It may seem obvious that the first step is to calculate your cost, or tax basis, or capital gain, the price you paid for the property, associated closing costs, and any other associated costs.
Now, calculate how much you’ve made in depreciation during your ownership of the property. What you make from the sale of a rental property is your capital gain and is taxed as such.
This only applies to the sale of investment-related properties.
What depreciation tax deductions do is let you recover the cost of the properties. In simple words, its an amount for the deterioration or obsolescence of the property.
Once you’ve calculated your tax basis, you’ll know the status of the loss you’re going to face.
Use my free rental property Excel spreadsheet to calculate this upfront.
See Related: Best Rental Income Trackers
Net Operating Loss
Depending on how big of a loss you’ve incurred, it may affect your overall income as well. If you have a net operating loss, NOL, it means your deductions from your rental property sales have exceeded the gross income.
This allows you to redeem some of the taxes that you paid in the previous years, which in turn means you can even take forward the loss you’re currently facing to recover in the future years.
Deduct Passive Activity Losses
Passive income, which is generated from other businesses that they have no active involvement in, allows you to deduct costs from your rental losses.
Suspended passive activity losses, more commonly known as PALs, are deductible passive losses against passive income. You can benefit from PALs if your rental property hasn’t been faring well in the past few years.
Having a passive income will cushion the blow of your loss, so if you haven’t been able to generate any, you should figure out how to deal with rental property losses that operate on passive-loss.
See Related: Best Apps for Real Estate Investors
Reduce Your Losses However You Can
There are quite a few ways you can lose money in the rental property business, and it doesn’t always mean you’ve done something wrong.
You can even lose money where there is positive cash flow – that’s how the rental market and overall economy works.
One way to reduce your losses is to convert your personal residence into a rental property. It is a loophole that works with prerequisites.
It depends on whether you report your property as a rental before or after a decline in value. If your property declines in value after you’ve reported it as a rental, congratulations! It is most likely a deductible loss, and you’ll get your benefit.
See Related: Real Estate Crowdfunding Guide
Seek Professional Help
It never hurts to ask qualified personnel for advice. Be sure to consult a tax attorney or accountant to look at your taxes and finances well before you sell it at a loss.
Spending on hiring proper help will prove beneficial and is much more economic-friendly than risking an audit where you can lose much more.
You can also seek the help of a reliable real estate agent who understands the local market and can help upsell your property.
See Related: How to Start with Passive Real Estate Investing
Conclusion on Selling a Rental Property at a Loss
If you’ve decided to sell a rental property at a loss, this guide will help you minimize the blow to your finances.
It isn’t uncommon to face losses in the real estate business, so don’t feel too bad. There are always ways to make up for the lost money.
Make sure you do your research and put in the effort to rent out properties that fulfill the demand of your target area. Beware of when the market takes a dip, and have back up plans in place.
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