When to Sell Real Estate

Many individuals have done well by investing in real estate over the years. Some of their investments have been in vacant land and others in commercial or residential rental properties. But there often comes a point in time when real estate, particularly commercial or residential rentals, is too demanding an investment compared to other assets such as fixed annuities, stocks or bonds. So what is the best way to transfer the responsibilities of managing this real estate, or liquidating this asset out of your portfolio?

With income properties, you could just hire a property manager. As I say to my clients, “do the math” as see if it’s acceptable to you.  Look at the trade-off of less cash flow if you hire a management company, versus, the extra free time and quality of life you’ll gain.  Let the numbers do the talking!  Sometimes this isn’t cost efficient or perhaps you’ve had enough and are certain that you want to get out of the business entirely.  What to do?


There are several ways to remove real estate from your portfolio and perhaps increase your income at the same time.

·        Utilize a “Capital Gains Elimination Trust” to avoid the “big hit” of capital gains in the year of sale.  This strategy works wonderfully well if you are at a stage in life where you no longer wish to be bothered with the real estate, yet you still need an income from your real estate investment.  This isn’t for everybody; however, it is one of the most exciting strategies to free up capital to produce an income stream.  This income stream can be guaranteed for the remainder of your life, your spouse’s life, and if desired, your children’s lives!  Call me to get more details on this time-tested strategy, 401-333-8000.

·        An outright sale is the simplest. Tax consequences, however, can take up to 15% of your long-term capital gains, up to 25% of your re-captured depreciation, if required, plus any State income tax.  Add them all up and it can be a rather large amount of money.

·        An installment sale can ease the tax bite, but you will have to wait much longer to get all of your sale proceeds.

·        A 1031 exchange to a less demanding or higher income producing property could simplify your life and defer income taxes.  For example, selling your apartment building and using the equity to buy a McDonald’s location results in less demanding property as the commercial tenant usually takes care of all property responsibilities.  This would take you to a much more passive investment.

·        You could use a “private annuity” if you desire to transfer the property to heirs and want to immediately remove it from your estate

If you want to keep your real estate investments, another alternative would be to get a new mortgage to free up cash that you could leverage into other investments for further portfolio diversification.

Before you make any changes though, you might want to take some factors into consideration. For instance, what does your family think about this? Do your children expect to get or stay involved with the real estate? What if you’re married? Would your spouse have the ability or even want to take care of the real estate portfolio if you died or became incapacitated?  If not, you might end up leaving your spouse with a bundle of problems and unwanted responsibilities.

Coming up with the appropriate strategy to remove real estate from your portfolio needs to be approached with a coordinated effort that addresses your financial, family, legal, and tax situation.