Are You Considering Selling an Investment Property For Cash In New Jersey?

People signing real estate contract for selling an investment property in New Jersey for cash - Quick Home Buyers NJ

While investors typically benefit most from holding onto their investment properties so that they can continue to build their wealth over time, there are some circumstances where it makes more sense to let go of a property.

If an investment property has stopped producing a steady stream of income, is losing its value due to a deteriorating neighborhood, or you’re no longer able to manage tenants and maintain it, it is probably time to consider selling.

Whatever the reason is for selling your property, there are certain steps that you can take to ensure that you make the most profit out of your sale. How you proceed will depend on your goals, the urgency of your situation, and your financial position, but here are a few things in particular that you should consider:

Steps for Selling an Investment Property

  1. Hire an agent

Selling a property involves a rather intimidating amount of paperwork, some of which you may not be familiar with or particularly aware of. Without any outside help, you would have to research what forms and other documents need to be filed and who needs to receive them to start the sales process and keep yourself protected.

But why not hire a real estate agent to help you instead of trying to take on everything yourself? An agent will save you a great deal of time and energy, and the 5-6% they will receive as a cut from the sale is worth it when you consider all of the efforts they put into finding you a buyer and getting your property sold quickly and efficiently.

  1. Make changes wherever necessary

A real estate agent, especially an experienced one, will know the exact steps to take to make your property ready for sale. One thing that you will need to do is get an inspection done to help you get the best price for your property.

This inspection will help you determine whether to make repairs, upgrade, or sell the house as-is. If any essential changes need to be made, take the time to complete them because this will increase your property’s value and make the process of getting a buyer much smoother.

  1. Put enough effort into marketing

When it comes to selling your property and ensuring that you quickly secure a buyer, marketing is crucial. Your real estate agent will work hard to get your house on the market and in front of as many potential buyers as possible, but there are things you can do to help move the process along as well.

You can create ads and posts on social media with good quality photos of your home, advertise using online classified ads, and even send an email to friends and family with a link to your listing so that they may share it with someone they know.

  1. Stage the space

Marketing isn’t just about getting the word out to the public. It’s also how you get those people interested in what you’re selling. For this reason, it’s best if you take the time to stage the property that you are looking to sell.

When you list your house for sale, you can host open houses where prospective buyers come and check out the property. The staging you have done will help convince them that your home is livable, welcoming, and practical for their needs both now and in the future.

While your real estate agent can handle the open houses and answer any potential buyer’s questions, it doesn’t hurt to make yourself available to listen to any offers made and take your time going through them as well.

  1. Close the deal

Once you are aware of all offers available to you, it’s time to make a decision. After considering what option works best for you, you can then sit down with the buyer and their representative to finalize everything. The realtor you hired will be there to help guide you through this whole process, handling any negotiations and ensuring that you get the best deal possible.

When Should You Sell Your Property?

Selling a property that is bringing in consistent income may not be a smart decision because, in many circumstances, your wealth and capital gains grow over time as your property increases in value. It’s also important to keep in mind is that when you sell an investment property, there will be various expenses that can quickly eat into your profits.

While there can be potential downsides to selling, there are times when letting go of your investment property is necessary. Not all properties grow in value and prove to be as lucrative as anticipated, and sometimes it no longer makes sense personally or financially to continue holding onto a property.

Here are a few possible scenarios that may encourage you as an investor to consider selling your property:

  1. A life-changing event occurs

When making this particular investment, you most likely did not have to account for any significant upheaval in your life that could impact you personally and possibly financially. Though every investment comes with some level of risk, you were motivated by the potential to grow your wealth and experience financial freedom.

A life-changing event could come in the form of a new baby, a serious illness, a divorce, or even a career change. Depending on your circumstance, you may be faced with a need to sell your investment property and reallocate a significant amount of money to other areas of your life.

If you are in a position where you cannot work and need money immediately, even if residual income from your property is satisfactory, selling it may be the best option available to you at that time.

  1. You have better sources of income

Not all passive income investment opportunities are equal. As a sensible investor, you know that having a diversified portfolio is the best way to balance your risk and reward ratio. Life can be rather unpredictable, and there’s always a possibility that things can change at any given moment.

Spreading or diversifying your assets helps limit your exposure to any one category of assets and reduces your portfolio’s volatility over time. This practice helps you steady the ship if any one of the investments you depend on experiences difficulty, thus costing you income. Since there are many passive income sources available today, you may come across a new opportunity that’s much more lucrative than one of your current investments.

By swapping out your investment property for a better alternative that doesn’t require significant maintenance and tenant management, you can make more profit with less work. When you have superior sources of income, the house or condo you are holding onto probably doesn’t seem worth all of the effort anymore.

You may have earned money from this property and benefited from it for quite some time, until recently. And while it’s typically best to hold onto your investments, the money you earn from it will likely not be enough to motivate you to keep pushing forward if you’ve lost interest. At this point, it’s better to find something else to invest in that you feel good about rather than forcing yourself to hold onto a project that’s become a bit of a dead weight.

  1. When you notice an over-supply of properties in the pipeline

As a business person, you understand the dynamics of supply versus demand. In any good market, these forces tend to balance each other out for the most part, though there are times that weight falls on one side and raises or lowers the other.

While you may be enjoying good prices at the moment, this can easily change when you begin to see a large amount of new real estate investments coming up in the pipeline. A sharp increase in supply will quickly diminish demand, which will end up affecting the income that you have been enjoying up until this point.

When you see an over-supply of homes or properties beginning to flood the market, then you know that selling your investment property is the best way out of this situation. Attempting to still hold on to this investment may end up costing you a significant amount of money instead of earning it.

What Taxes Will You Have to Pay?

In a letter to Jean-Baptiste Le Roy, Benjamin Franklin expressed that the only sure things under the sun are death and taxes. While the concept itself goes back long before this letter, it still rings true to this day.

Not only are we required to pay taxes on any income from employment or sales of goods and services, but also on money made from investment sales. Here are a couple of taxes you will have to part with when selling an investment property:

  1. Capital Gains Tax

A capital gains tax is a tax on the profit you made from an investment that you sold. Imagine that you purchased a property that was worth $100,000, and then you held onto it for some time. Now, say that when you chose to sell this property, you received $130,000. That profit of $30,000 is known as capital gains.

This capital gains tax will be applied based on several factors. The first is how long you held onto your investment. If you had it for more than a year, you would attract what is known as a long-term tax. Depending on your tax bracket, these tax rates would be 0%, 15%, or 20%. If you are an investor with a high income, an additional 3.8% net investment income tax may also be applied to your investment profits.

If you held your investment for less than a year, then a short-term capital gain tax would be applied instead of a long-term tax. This form of capital gains tax is imposed in the same manner as ordinary income. If you sold your investment property for less than what you bought it for, you would not be taxed for the loss.

  1. Depreciation Recapture

Aside from the capital gains tax, you will also face a depreciation recapture. Whenever you own a property, you will typically need to spend money to maintain it and potentially raise its value. On top of maintenance, repairs, and upgrades, you will also need to pay for things such as operating expenses, property taxes, and mortgage insurance.

As a property owner, the IRS allows you to claim a depreciation deduction for every year you own the property, which helps reduce the amount of rental income that is taxable. However, you only get to enjoy this benefit during the time you own the property. Once you sell your investment property, the IRS will use a depreciation recapture tax to take this benefit back.

Depreciation recapture tax rates can go as high as 25%. To determine exactly how much will be taken back from you, you can use the IRS worksheets provided with the Schedule D form.

How to Avoid or Defer Paying Taxes

The taxes you face when selling your investment property can be very high, especially if you’ve maintained ownership of the property for a very long time or if you were able to sell it for a much higher price than you paid for it.

Unless you will be cashing out and keeping all of the proceeds of the sale, there is a way to avoid having to pay some or all of your taxes. This strategy is known as a 1031 Exchange, which may allow you to take the proceeds from one property and quickly move them to acquire another, known as the replacement property. You will be able to potentially defer paying both depreciation recapture taxes and capital gains tax from the initial investment property.

The decision to sell your investment property is a big one and is not to be taken lightly. It may be best to sit down with your financial advisor and go over all of the details before moving forward.

The bottom line is that if you want to sell your investment property, it’s essential to focus on the best exit strategy possible. In doing so, you can ensure that you make the most profit possible from your sale, save on taxes, and hopefully have the opportunity to invest in another property with much more growth potential.