The last few posts I have written have been about selling your property. If you are thinking about selling, the time is now. The current real estate market is up to levels we may not see again for years. But you might not make as much as you think when you sell. There are expenses involved in selling. Some pretty substantial expenses.
What are these selling expenses? I have come up with five significant expenses that I think most investors will bear when they sell. These are:
- Preparation Expenses
- Commissions
- Closing Costs
- Capital Gains Taxes
- Recapture Taxes
These Expenses Are Not Always Simple
In this post, my goal is to introduce these expenses and some of the basics of each. In later posts I hope to go into much more detail. Some of these expenses, especially those involved with Uncle Sam, are just too complicated to be dealt with in this brief post. I therefore feel it is important to just introduce them now and get into the details later.
These expenses are vital for investors to understand. Otherwise, how can we make a proper and informed decision with regards to selling? I think many uniformed investors believe that their profit will be the sales price less whatever they paid. But with investment properties, it is never that simple.
Preparation Expenses
Most want to get top dollar when they sell something. Getting top dollar often means a bit of spit and polish as they say to make something look its best. Real estate is no different and some of these preparation expenses might involve lawn and landscaping work, a bit of paint, or some other repairs. This expense is however completely under your control. You can decide if and how much you want to prepare. You can sell as is or perhaps $1,000 will net you real gains on the sales price or you can sell “as is.” You get to decide what makes sense for you.
Commissions
Commissions are fees paid (often to Realtors) for bringing a buyer and seller together. How much this expense is will often depend on your local market conditions and customs. It is another expense that is somewhat under your control. Commissions can be steep, running as much as 6% or more of the sales price. Of course you can negotiate commissions or choose not to use a Realtor at all, but then finding a buyer and selling may prove difficult.
Closing Costs
Whenever you sell a property, there will always be attorney’s fees, title fees, inspection fees, recording fees, transfer taxes and a whole host of other fees. Again some of this can be controlled by you and some of it will be dictated by local custom or even state laws. No way around it however, there are always fees associated with selling. And the bigger the real estate deal, the bigger the expense of closing costs.
Capital Gains Tax
Hopefully, you will sell you property for more than you paid for it. That means a profit for you. Unfortunately, Uncle Sam wants his cut of your profit and his cut is called capital gains taxes. Capital gains taxes can get complicated quickly. There are differing federal rules based on length of ownership, if you have ever lived in the property and how much income you have. These taxes can be deferred but they cannot be avoided in this lifetime. If you want to cash out at some point, you will have to pay.
Recapture Taxes
Capital gains taxes put a crimp in your pocket and recapture taxes will to. These taxes are the dirty little secret of buy and hold real estate investing. The tax breaks you received by depreciating your properties have to be paid back when you sell. There is no way around them. Even if you did not actually take the depreciation deduction the IRS will assume you did. Recapture taxes will be significant and they can be difficult to calculate. These taxes can be deferred, but if you want to cash out in this lifetime, you are going to have to pay them.
The expenses of selling a property add up very quickly and can take a big bite out of potential profits. These expenses are often not properly expected, calculated or understood by many investors and thus poor decisions are made. Should you never sell because of these expenses? No, I do not think so. But failing to understand them will leave you with an unclear picture and wondering where all of your money went. If future posts, I hope to make things a bit clearer.
