So, how do you know if you should sell to your tenant, or keep your asset and the passive income it collects? Read on to learn how to make a savvy investment choice and how to potentially defer paying taxes by trading up, if you do decide to sell to your tenant.<\/p>\n As is advisable in any home sale, work with a top real estate agent<\/a> to evaluate the strength of your renter\u2019s offer.<\/p>\n A stellar agent will help you compare what you paid for your home and how much you invested in its rehab against your renter\u2019s offer. They\u2019ll also help you determine your home\u2019s worth<\/a> based on other homes for sale in your area by running a comparative market analysis<\/a>.<\/p>\n If your renter\u2019s offer isn\u2019t extraordinarily competitive, consider the cost-benefit of selling to them anyway.<\/p>\n \u201cThere\u2019s a convenience in selling to a renter that you should factor in when considering the sale price,” Pettersen explains. \u201cYou may be able to skip the repairs, the contractors, scheduling the cleaners, hiring a photographer, posting it to the market, and hosting an open house.\u201d<\/p>\n You also won\u2019t have to worry about the difficulty of trying to sell the home to another interested party while the tenant is living there, which presents unique challenges<\/a>. \u201cHow much more money are you willing to pay, or lose, for the convenience of having a sale now, rather than waiting for it and expending time, energy, and money just to hopefully earn more?\u201d<\/p>\n More goes into determining how much money you\u2019ll walk away from your home sale with than the sale price alone.<\/p>\n \u201cAs a math guy, my brain always goes straight to the numbers,\u201d Pettersen says. \u201cWhat title fees are you paying? How much will you pay the agent who represents you or the attorney who drafts your documents?\u201d<\/p>\n To ensure you\u2019re making the best long-term financial move, Pettersen advises you to figure your estimated net proceeds<\/a> based on your renter\u2019s offer against your house\u2019s long-term rental income, factoring in carrying costs<\/a>.<\/p>\n \u201cIt\u2019s important to have a long-term investment strategy,\u201d Pettersen says. \u201cAre you better off in the long-term with the immediate gain from a home sale? Will that home sale ultimately net you more than rent\u2019s netting you?\u201d<\/p>\n Pettersen says working with a financial advisor is always a good idea, but becomes especially essential when you find you need an impartial opinion \u2014 \u201csomeone who can take the emotion out of it to clear that picture up.\u201d<\/p>\n Before you decide whether to sell your house<\/a> to your renter, ask yourself this: are market conditions<\/a> on your side?<\/p>\n Signs that it may be a good time to sell:<\/b><\/p>\n Signs you may want to hold onto that rental:\u00a0<\/b><\/p>\n If you sell your house to your renter, the proceeds will likely be counted as taxable capital gains<\/a>, as far as Uncle Sam\u2019s concerned \u2014 you won\u2019t qualify for the homeowner exclusion<\/a>, because this is an investment property, not your primary residence. This means you could easily kiss 15%-20% of your profit<\/a> goodbye, depending on your income tax bracket<\/a>.<\/p>\n If that\u2019s enough to scare you off selling, hit pause \u2014 there\u2019s a tax advantage that can make selling to your tenant a profitable strategy for leveling up your portfolio: a 1031 exchange.<\/p>\n A 1031 exchange<\/a> allows you to defer paying taxes on your home sale\u2019s gains, and reinvest them into a new property, so long as you meet several criteria<\/a>:<\/p>\n \u201cSay we could sell a property at a $50,000 gain and acquire a property that fits our portfolio better,\u201d Pettersen explains. \u201cIf we simply sell the home to the renter, we’re hit with those capital gains taxes right away.\u201d However, if you closely follow 1031 tax code, you can put that $50,000 directly into the next property.<\/p>\n \u201cBe sure to consult a tax professional who\u2019s worked with clients that have done this before,\u201d Pettersen advises. Specific verbiage<\/a> is required in the sale contract, and parsing the relatively complicated tax codes of a 1031 exchange can quickly become murky water. A CPA or tax attorney will help you ensure you qualify and check all boxes.<\/p>\n Rent-to-own agreements are, first and foremost, leases. Your renter is still your legal tenant<\/a> until final purchase, you\u2019re still the legal landlord, and there\u2019s not necessarily any requirement that the renter does, eventually, buy the property.<\/p>\n Rent-to-own agreements<\/a> can allow buyers to work toward buying their first home if they don\u2019t yet have the money for a down payment. While every deal is drawn up differently<\/a>, rent-to-own agreements have common advantages and disadvantages for investors.<\/p>\n After you field your renter\u2019s offer<\/a> with the help of a top real estate agent, you can decide whether to decline your renter\u2019s offer outright, accept the offer, or negotiate.<\/p>\n Before you begin the negotiation process<\/a>, talk to your agent about your selling priorities. Together you\u2019ll decide on the absolute lowest price you\u2019re willing to accept, and counter your tenant<\/a> with a price in the sweet spot.<\/p>\n If you\u2019ve already locked in your next property and could use the liquid cash, then your priority may be to sell as quickly as possible \u2014 so long as you don\u2019t take a loss<\/a>. The speed and convenience of selling to your renter may then constitute reason to sell at a lower profit.<\/p>\n If your ultimate goal is to make the highest profit possible on your home sale, it\u2019s in your interest to counter the renter\u2019s offer<\/a> with a deal that\u2019s at or greater than market value. Your renter may choose not to play ball, in which case you can try sweetening the deal<\/a> by offering to help with their closing costs \u2014 or simply say no harm, no foul,<\/i> and continue holding the rental and generating income.<\/p>\n![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/my-renter-wants-to-buy-my-house-agent-775x413.png\")
<\/a>1. Evaluate the offer strength with the help of a top agent<\/h2>\n
2. Weigh home sale earnings vs. long-term rental income<\/h2>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/my-renter-wants-to-buy-my-house-house-666x381.png\")
<\/a>3. Decide if the market conditions are favorable<\/h2>\n
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4. Consider how capital gains may impact your net proceeds<\/h2>\n
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![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/10\/my-renter-wants-to-buy-my-house-pen-775x413.png\")
<\/a>5. Explore the pros and cons of rent-to-own agreements<\/h2>\n
Pros<\/h3>\n
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Cons<\/h3>\n
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6. Negotiate the price and terms in your favor<\/h2>\n
7. Hire a real estate agent or attorney to facilitate the transaction<\/h2>\n