Needing to sell a rental property in North Carolina? In this article we will discuss some of the most important considerations when selling rental property in North Carolina including how to avoid paying capital gains tax and much more.
Table of contents
- How to Sell Rental Property North Carolina
- 10 signs its time to sell your rental property in North Carolina
- How to Have a Smooth Rental Property Sale
- Considerations when Selling a Rental Property to Avoid a Tax Hit
- Selling Rental Property with a Tenant in North Carolina
- Steps to Selling a Rental Property North Carolina
- Closing Thoughts: How to Sell Rental Property Without Paying Taxes North Carolina
How to sell rental property North Carolina
Owning rental property is one of most trusted and proven methods of building wealth. The consistent stream of monthly cash flow can significantly supplement your regular earnings, providing both financial stability and the reassurance of property ownership. Rental property owners in North Carolina have especially capitalized on the appreciation of their home values. Over the last five years North Carolina ranks #6 in the nation with a 76.53% increase in home values according to the Federal Housing Finance Agency’s House Price Index.
However, life can present unexpected challenges, prompting the need to divest from your rental property. Yet, determining the best time to sell can be daunting so we’ve compiled a comprehensive guide to assist you in making informed decisions on determining the right time to sell a rental property in North Carolina along with tips on how to avoid as much of the tax hit as possible so you walk away with more cash from the sale.
Case Study From the Author:
How to Sell Rental Property North Carolina
As a rental property owner, a fix-and-flip investor, and realtor, I have gained nearly a decade of experience to know the intricacies and consequences of selling rental property in North Carolina. I have personally been involved (either as buyer, seller, or realtor) in over 100 transactions involving rental property since 2017. Here is a case study with James in which we assisted him with a 1031 tax exchange to avoid capital gains tax on the sale.
James approached us in 2023 with interest in selling his rental property in Fayetteville, NC. His goal was to sell his single family rental and buy a small multi-family investment property. After performing a market analysis on what we expected to sell the house for we determined there would be a significant profit from the sale that would allow him to put down a large down payment on the multi-family property. Since James had not lived in the home for 2 out of the last 5 years, he would be subject to a capital gains tax that would amount to 15-20% of his profit. So he decided to use the power of the 1031 tax incentive that would defer his capital gains tax and allow him to use 100% of his profit as a down payment on his next purchase.
The sale was seamless due to proper planning on behalf of James. He informed the tenant of his desire to sell months prior to the lease expiration. This allowed for a timely and cooperative move-out from the tenant. After a move-out inspection, James addressed some of the minor deferred maintenance items that would likely come up in an inspection report. And he was preparing for the 1031 exhange by actively shopping for other properties while he prepared for this property to be sold. When we contracted a buyer on his first property, he notified his 1031 exchange custodian, made of an offer on a multi-family property, and succesfully closed both properties without paying a penny in capital gains tax! We’ve helped many in this situation – hopefull this helps you too!
-Jason Hill, Freedom Choice Investments
10 signs its time to sell your rental property North Carolina
How do you know when it’s time to sell your rental property? This can be a difficult decision for many landlords as there are many factors to consider. Below is a list of considerations to help you determine if now is the right time to sell your rental property in North Carolina.
Being a landlord is taxing
The duties of a landlord involve numerous responsibilities such as property maintenance, tenant acquisition, regulatory compliance, and property management. If you’re not keen on handling these tasks yourself or investing in a property management service at an additional expense, selling your rental property might be the more favorable option.
Soaring home sales prices
Source: Zillow
According to Zillow.com’s home value index, North Carolina property values have risen from an average of $205,655 in September of 2019 to $330,820 in August of 2024! That’s a 161% increase in five years! Now may be as good as time as ever to capitalize on your profits as no one knows how long real estate prices will remain this high.
Demand for housing is strong
Despite the shifting economic conditions, the demand for housing in North Carolina remains high. North Carolina added more people in the last year than any other state except Texas and Florida with an additional 140,000 people added to the permanent resident population of North Carolina between July 1, 2022 and July 1, 2023.
According to the North Carolina Realtors Association the housing inventory measured in at a 3.4 month supply in January of 2024. For reference, a six month supply is considered a balanced market. North Carolina’s low housing inventory continues to cause pressure on home prices to rise. This has resulted in a 9.4% increase in median sales prices in North Carolina over the last 12 months. If you decide to sell your rental property in North Carolina you should have no problem finding an interested buyer.
Source: NC Realtors
Negative cash flow
Perhaps you own a rental property, but your mortgage payment is equivalent, or exceeds, what the market rental rates are in your area. This has become more common since 2022 due to increasing interest rates. If your rental income does not meet or exceed your mortgage payment, it may be time to consider selling your rental property.
High property taxes
High property taxes can also affect your cashflow on a rental property. Many counties in North Carolina have seen soaring property tax values over the last several years. Wake county saw a 50.6% increase in property tax valuations in their 2024 re-evaluation cycle. That’s the largest ever increase in the county’s history. This will most certainly have a negative effect on your cash flow.
Homeowner’s insurance rates on the rise?
The North Carolina Rate Bureau has filed a request with the North Carolina Department of Insurance that proposes to increase homeowners insurance rates statewide by an average of 42.2 percent effective August 1, 2024. However, this dispute was settled in May of 2024 at an increase of 8% on average for North Carolina homeowners. If homeowner’s insurance rates continue to rise, these factors could be detrimental for many North Carolina rental property investors.
Rental property needs repairs
As your rental property ages, the expenses associated with maintenance and repairs can become increasingly burdensome. Should you find yourself consistently grappling with pricey repairs or contemplating major renovations, opting to sell could prove to be a more financially advantageous choice. By selling your rental property, you free yourself from continual expenses, affording you the opportunity to embark on a fresh start.
With more real estate investors looking for distressed properties, you’d have no problem offloading a property in need of repairs.
Rental property is inherited property
You might have inherited a rental property, yet reside out of state, or feel unsuited for the role of landlord. If this situation resonates with you, consider selling the rental property to cash out and realize the gains. Ensure you acquaint yourself with the probate process in North Carolina to adequately prepare for this scenario.
Problem tenants
One of the biggest pain points for landlords is dealing with tenants. In some cases, the stress some tenants cause can turn your job as a landlord into a heavy burden.
Dealing with late rent, property damage, or antisocial behavior can take its toll physically, mentally, and emotionally. While it’s possible to evict delinquent tenants, the process is costly, stressful, and time-consuming.
Of course, the occasional problem tenant is normal. And in some cases, hiring a property manager alleviates the hassle of dealing with delinquent tenants. But if you no longer want to deal with bad tenants, selling a rental property and investing your cash elsewhere may be the best option.
Major life event
When it comes to life, one thing is certain… and that’s uncertainty. Despite meticulous planning and cautious measures, unexpected events are bound to unfold.
And all too often, significant life events disrupt the management of rental properties. Whether grappling with the loss of a loved one, navigating through a divorce, embarking on a job relocation, or contending with health issues, these circumstances can impede your ability to focus on taking care of your rental properties. No matter what the cause, major life changes often consume both time and financial resources leading to a serious re-evaluation of rental property ownership.
How to have a smooth rental property sale North Carolina
Now that we’ve discussed how to know when to sell your rental property, now it’s time to discuss how to sell your rental property. Here are some pro tips to make the sale as painless and hassle-free as possible.
Know the type of buyer you want
Before anything else, you have to find out the type of buyer that you want. This will help determine what marketing strategy to employ, how to price the rental home appropriately, and what to do with your existing tenant.
Sell your rental property to a real estate investor
These types of arrangements can often benefit the seller through convenience. Many investors are willing to buy the house as-is and can even be willing to inherit your existing tenant. However, investors typically want to have some equity as a trade-off for the convenience they offer
Sell your rental property to a first-time home buyer
Most first-time homebuyers will be using a loan to purchase the home. This can lead to a longer sales process. Home inspections are common in these scenarios and the lender will require an appraisal. Although you have the greatest potential of profits through this type of buyer, it will entail updating and repairing the home to achieve the highest sales price, along with having the house empty and vacant, thus resulting in loss of rental income while marketing the house.
Sell your rental property to your tenant
This can often be the simplest way of selling your rental property in North Carolina for obvious reasons. Not having to remove the tenant from the home and selling it to someone who is familiar with the house (while still collecting rent) seems nice. But not all tenants are interested in buying, and if they are, tenants may not always qualify for a home loan.
Arrange a pre-listing home inspection
Ordering a home inspection prior to marketing your rental property for sale is one of the best ways to avoid, or limit, potential repair requests from a buyer. A licensed home inspector can recommend necessary repairs needed to bring your property up to standard. Marketing the home with a list of completed repairs also gives buyers more confidence when submitting their offer.
Decide if its worthwhile to do repairs or sell as-is
If your rental property is in need of repairs, it may feel like you have no other option but to spend time and money on home renovations in order to sell at a profit. But investing your resources into home repairs may not always result in financial gain. It can often be just as profitable to sell your rental property as-is to an investor – saving you the time and money it would take to update your property otherwise.
Yes, a well-maintained, modern, and aesthetically appealing property typically commands a higher asking price on the real estate market compared to one in disrepair. But it’s important to evaluate the potential gain vs. the risk associated with modernizing a home.
We recommend obtaining quotes licensed contractors, speaking with local real estate agents to understand your property’s value, and fielding offers from local real estate investors to help you come to the right decision.
Do a lien search
A local real estate attorney can help you run a title search for your rental property. This will inform your of any liens, judgments, and undisclosed encumbrances that need to be satisfied in order to sell your rental property. Addressing these issues preemptively ensures a smoother real estate transaction process.
Inform your tenant about your intentions to sell the property
Your tenants must be informed of your desire to sell the property to give them ample time to relocate. In North Carolina, if there is a lease signed between the tenant and the landlord, the lease agreement must be adhered to when giving tenant proper notice and timeframe to move.
To encourage tenant cooperation, we’ve seen many landlords offer incentives to tenants to encourage the move. Planning ahead, communicating clearly, and respecting your tenant’s ability to find another living situation is the best formula for a smooth rental property sale in North Carolina.
Study the tax implications of selling a rental property
Prior to proceeding with the sale of your rental property, it is crucial to comprehend the tax ramifications involved. Selling investment property has different tax implications than selling your primary home. Consult with a financial advisor or accountant to determine the portion of your profits owed in taxes and explore strategies to mitigate these expenses.
Depreciation recapture tax
Aside from regular income taxes, landlords might encounter a depreciation recapture tax when selling rental properties. This tax pertains to previous depreciation deductions claimed for the property and is levied as a one-time expense on the profits from the sale.
Capital gains tax
If your rental property value has increased since acquisition, any gains derived from its sale will be susceptible to capital gains tax.
However, if you’ve owned your rental property for a year or less, the profits you obtain from the sale will be taxed as short term capital gains, meaning it will be taxed at the same rate as your ordinary income tax. Depending on your tax bracket, this means you will be required to pay anywhere between 10% to 37% in short term capital gains tax.
Illustrative example of tax consequences when selling a rental property
Let’s say you purchased your rental property five years ago in Fayetteville, North Carolina for $200,000 and you’ve just sold it for $250,000. Over a five-year holding period, you have claimed a $12,500 depreciation expense.
Let’s assume you belong in the top tax bracket, therefore a 25% depreciation recapture tax rate and a 20% capital gains tax rate applies:
$12,500 x 25% depreciation recapture tax rate = $3,125
($250,000 – $200,000) x 20% capital gains tax rate = $10,000
In this example, the tax bill is $13,125.
Keep in mind that tax regulations can differ based on individual circumstances. Therefore, even after reviewing this guide, it’s advisable to seek guidance from a tax professional or a real estate attorney.
Considerations when selling a rental property to avoid a tax hit North Carolina
Take advantage of the 1031 tax deferred exchange on an investment property
A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred. In essence, it involves a sale of one property and a purchase of another of its like-kind without (as the IRS sees it) cashing out or recognizing a capital gain.
What you need to know about a 1031 exchange
- A 1031 exchange is a tax break written into the IRS tax code that allows you to sell a property held for business or investment reasons and exchange it for a new one bought for the same purpose, thereby enabling you to postpone capital gains tax on the sale.
- The properties involved in the exchange must be deemed like-kind according to the IRS regulations
- The funds generated from the sale must be placed in escrow by a third party and subsequently utilized to purchase the new property. You are not allowed to receive these funds, even temporarily.
- Upon the sale of your property, you have up to 45 days to identify a replacement property and 180 days to close on the replacement property
- When a homeowner dies and was holding property as part of a 1031 exchange, the property will pass through the estate at its current market value (referred to as a step up basis) to the heirs of the estate resulting in all of the built in gain to disappear upon the taxpayer’s death
Consider living in your rental property prior to selling to avoid capital gains tax
Another way to avoid capital gains tax when selling a rental property in North Carolina is through the Principal Residence Exclusion. This IRS rule states that an owner must have owned and used the home as their primary residence for at least two of the last five years preceding the sale. This would enable you to bypass taxes on profits of up to $250,000 (or $500,000 if you’re married and filing jointly). While this approach may not be viable for everyone, it’s worth considering when contemplating selling your rental property in North Carolina. As always, consulting a financial advisor or accountant is encouraged.
Capital gains tax exemption for military members
There is also a specific provision for taxpayers or their spouses who are serving in the military and have been stationed more than 50 miles from home (or ordered to live in government housing) for more than 90 days. While non-military people have to occupy the home for two of the last five years before the sale, this exemption (under section 121(d)(9)) states that military members can pause that clock for up to 10 additional years to deal with a PCS.
In essence, a military seller can get the tax exemption from the first $250k (or $500k if married) if they’ve lived in the home for two of the last 15 years (the amount of the original five year period plus 10 additional years maximum).
Tax laws do not permit you to do this on more than one property at a time.
Evaluate the property for possible tax-deductible repairs
Improving your rental property through repairs not only enhances its appeal to potential buyers but also opens up the possibility of claiming tax deductions. However, it’s essential to note that these deductions are applicable only if the repairs are aimed at maintaining the rental property’s functionality rather than increasing its value. For further details on tax-deductible repairs on your rental property, it’s advisable to seek guidance from a tax professional.
Use tax harvesting to offset the capital gains
If you do find yourself liable for paying capital gains taxes when selling your rental property, you may want to consider tax harvesting tactics to mitigate those taxes. This strategy entails selling other investments that have incurred losses to counterbalance the gains derived from the sale of your rental property.
Selling rental property with a tenant in North Carolina
Selling rental property in North Carolina with a tenant can be tricky, but is much easier with a well drawn-up lease agreement that clearly defined an early termination clause. A clearly stated early termination clause should include procedural guidelines and lease termination options under the following circumstances:
- Lease terms were not honored by the tenant
- Tenant is failing to maintain property
- Tenant is not paying rent
- Landlord decides to sell the property
However, even without an early termination clause in your lease agreement, you can still sell your tenant occupied property in North Carolina utilizing the methods below:
Wait for your tenant’s lease expiration
If your tenant is adhering to the terms laid out in the lease agreement, they are entitled to remain in the property for the entire duration of their lease agreement. In such circumstances, you are obligated to honor the terms of the contract and wait until the lease concludes before selling the rental property.
Sell your rental property to your existing tenant
Your tenant is someone who is already fond of the property, which means they may prefer to stay and avoid the inconvenience of relocating while you seize the opportunity to cash out of your investment property. Selling your rental property to your tenant means bypassing real estate agents and their commissions.
Sell your rental property with an active lease
There are many real estate investors who are looking to purchase rental properties with active cash flow in place. This may present a great option to sell your rental property with an active lease. The buyer is legally required to honor the existing lease, but if it’s cash flowing – it could be a great investment!
Offer your tenant incentives to vacate
If you have a tenant with an active lease but want to expedite the sale process, you can offer them incentives to move early. This could include cash incentives, refunds on security deposits, or reduced rent in exchange for agreeing to vacate the property before their lease is up.
Steps to selling a rental property North Carolina
After you’ve decided how you’re going to handle the tax consequences of selling your rental property and have decided what you’re going to do with your tenant, now you can take action steps to sell. Depending on your goals and objectives, you have three main options for how to sell rental property in North Carolina.
1. Real estate agents
Hiring a real estate agent is frequently the most efficient and straightforward approach to selling your rental property in North Carolina. They will manage all aspects of the process, including advertising, showings, and negotiations with prospective buyers.
2. For sale by owner
If you possess experience and understanding of the real estate market, opting to sell your rental property yourself (known as an FSBO) can help you save on the commission fees typically paid to an agent. Nevertheless, it’s important to note that this approach can demand substantial time and effort on your part.
3. Real estate investors
If your rental property requires repairs or presents other factors that may impede a traditional sale, you might explore the option of selling to a real estate investor. These investors frequently acquire properties in their current condition and can expedite the closing process by foregoing inspections and repairs.
Regardless of the option you select, it’s essential to conduct thorough research and compare various agents or investors before reaching a decision. Additionally, carefully reviewing any contracts or agreements before signing is crucial.
Closing thoughts: How to sell rental property without paying taxes North Carolina
There are numerous strategies available to capitalize on your investment while mitigating the impact of a substantial capital gains tax bill and other associated expenses that could diminish your profit. Options include selling it as a primary residence, conducting a 1031 exchange, utilizing tax harvesting, or undertaking tax-deductible repairs. However, even with these methods, selling a rental property in North Carolina can present its challenges, requiring careful consideration and planning.
These findings apply to all cities and towns in North Carolina, including Raleigh, Durham, Fayetteville, Johnston County, Sanford, Burlington, and surrounding areas.
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If you’re interested in saving time and energy by selling your property as-is to a cash home buyer like Freedom Choice Investments, we recommend filling out the form below to receive a no-obligation fair, cash offer. We have nearly a decade of experience helping landlords sell their North Carolina rental property fast and easy!
Call us at (919) 285-1284 for more information. We look forward to hearing from you!
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Author: Jason Hill
I am a seasoned real estate agent and investor with years of experience helping my clients navigate the intricacies of selling rental property in North Carolina. As the founder of Freedom Choice Investments my mission is to deliver simple and hassle free selling solutions to North Carolina homeowners. With the ability to either list your house or buy it as-is we have a unique offering that caters to those looking for ways to sell their rental property in North Carolina.