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When you find that it’s time to sell your rental property, you’ll need to understand the necessary legal and logistical actions to take.

While each sale is different, every landlord should follow the same four basic steps when selling a rental property.

  • Conduct a Property Lien Search

Before you can legally sell your property, you need to conduct a property lien search. A lien is a legal claim that your creditor has against your property. You can only transfer your property title if there are no liens on it.

Your creditor will retain the lien until you’ve paid off your mortgage debt. Therefore, your two options for achieving a clear title so that you can sell your property are to either pay off your mortgage or negotiate with your creditor.

Conducting a property lien search, which you can do either at the escrow office or online, helps you identify any obstacles you might have in this domain. To finalize a lien release, you’ll have to get a lien release document to prove that the lien has been cleared and the creditor no longer has any claim on your property. Seek the expertise of an attorney to help you in obtaining a lien release.

  • Transfer the Property Title

After all your liens have been cleared and you can legally sell your property, it’s time to transfer the title to a new owner. 

First things first, find the appropriate deed for the sale. The most common type of real estate deed when transferring a title is a general warranty deed. This transfers the property and all its interests from the seller to the buyer.  

Step two is to hire an experienced real estate attorney to help you prepare the deed. You don’t want to risk making mistakes on the deed by preparing it on your own without the expertise of an attorney. Make sure you review the deed and double check that the buyer’s information is correct. 

Next, take the deed to a public notary and sign it in front of them. Once you’ve signed the deed, it’s time to file it with the local county records office. In doing so, you’ll have certain fees and taxes to pay.

  • Transfer Any Existing Leases

If your buyer is also a rental property investor, you’ll need to transfer your existing leases over to them. 

You must prepare the following documents for your buyer:

  • Active, signed rental agreements 
  • Property tax bills and seller tax returns 
  • Any insurance claims 
  • The location of security deposits (bank accounts) and interest rates
  • A full maintenance history of the property 
  • Utility bills information
  • HOA documents 
  • Any relevant financial statements  

Once the buyer has reviewed everything, you can transfer the security deposit and other important property information when you transfer the property title.

You must let your tenants know about the transfer at least 10 days in advance. This means providing them with the new owner’s name and contact information, telling them where their security deposit has been moved to, and explaining how rent will be paid in the future.

Your tenants can negotiate their contract with the new owner for rent rate or lease agreement changes if they wish.

  • Calculate Depreciation and Recapture

When selling a rental property, it’s important to understand the tax concepts of sold rental property depreciation and recapture.

Depreciation is when buildings and other kinds of property slowly lose their value over time due to normal wear and tear. Because your rental property depreciates over time, you’re able to deduct a portion of your property’s value from your income every tax season, which saves you from having to pay tax on it.

In most cases, properties also appreciate over time, leaving you with gains. When it comes time to sell your property, the IRS taxes your gains in order to recover some of the taxes you avoided paying thanks to depreciation deductions. This is called depreciation recapture. Recapture is capped at 25%.

Conclusion

There are a number of administrative and legal actions you must take when selling a rental property, including clearing liens, transferring your property title and any existing leases, and paying the right amount in taxes. To guarantee a smooth sale and transfer, you must familiarize yourself with what each of these steps entails.

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