How many of us have heard the expression, “If it is not broken don’t fix it?” Surely many of us have both heard this expression and not heeded its traditional wisdom.
Today I would like to apply that ‘wisdom’ to cash-flowing real estate investments; in this case good performing rental property. Most of us are aware that real estate prices have increased considerably in both the residential and commercial markets. In view of this many feel that it is a good time to sell the properties that you purchased when prices were much more favorable. We have seen a bit of this in the real estate market here in Southwest Florida. Some have called this area the epicenter of the real estate bust back in 2007-2009. That may or may not be true but one thing is for sure, real estate prices have rebounded quite nicely from that time period until today. So maybe now is a good time to sell that real estate that you bought back then and…do what with the proceeds?
This is the point of this blog post; you have sold your good performing cash flow properties. Now what are you going to do with the profits? Some shrewd investors know how to do a 1031 exchange for different properties. Some may not be aware of this rule. If you are not aware of this potentially favorable tax treatment you should educate yourselves, it may be worthwhile for you. Just keep in mind that most likely the property that you purchase will be at todays prices and not those of 2007-2009.
Should you choose to just sell and reinvest the proceeds there will be at least capital gains taxes and depreciation recovery due on the sale. Please consult a tax professional for clarification on such matters prior to making a sale of real estate to be sure that you know what tax liabilities you may incur.
Perhaps you are considering the stock or bond market. Both are close to all time highs. Is this the best time to buy an investment, when it is at or near an all time high? That is up to you.
How about a good old-fashioned CD at the bank? From what I can see the going rates are under 2%. Don’t forget about the potential tax liabilities either. Even though the rates of return are low you are still taxed on the interest accrued.
There may be other investments that you are considering buying once you sell your rental property but ask yourself, “What will be my real rate of return?” Also, “What will be my tax liability?” Keep in mind that the IRS still grants favorable tax treatment to that rental property that you still own. If the property is competently and honestly managed you should be earning cash on cash return far in excess of 2% plus receive favorable tax treatment. Remember, you bought it when prices were low but keep in mind that rents were low back then too. Now rents have come up significantly and you are reaping the rewards of your savvy investment…so why would you want to sell it? Most investments today are yielding less than 2% and do not receive the favorable tax treatment that rental real estate receives. A good performing rental property can return up to 8% or more before including the tax breaks inherent in rental real estate.
The bottom line: Why sell a good performing rental property when you can’t buy any better investment for your money today?