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From Lease to Sale: How to Sell Rental Property in Washington

Many locals decide to turn their Washington real estate into rental properties. This investment can be a great source of passive income that could be used to pay off a house mortgage or monthly bills.

However, due to competition or unexpected circumstances, owners may need to sell their rental units or houses. Although this seems straightforward, selling a rental property in Washington can be challenging and burdensome.

If you’re at a loss on how to sell a rental property in Washington, this guide can help you navigate the ins and outs of this process. Here, you can learn how to shift from lease to sale while addressing legal considerations and maximizing benefits.

Understanding the Washington Rental Property Market

Washington Rental Property Market in Washington

The rental market in Washington is diverse, with prices varying depending on the type of rental property and its location. Cities like Seattle and Spoken are populated with rental properties due to job opportunities, cultural attractions, and amenities.

While big cities have sky-high rates, renting an apartment in Washington is still generally cheaper than in other states. Although rent prices tend to fluctuate, the median rent in this state is $1,950 as of May 2024.

Despite the steady demand for rental properties, some homeowners may find selling to be a better option. So, what are the main reasons why property owners put up their leased rental real estate in Washington for sale? Let’s find out!

Key Reasons To Sell Your Rental Homes or Real Estate In Washington

Rental homeowners in Washington have their reasons for selling their homes. Some may figure it’s the right time to sell their home, while others simply want to retire from being a landlord.

If you own a rental place in Washington, let’s take a look at some of the reasons why you should list your property for sale:

1. Higher Home Equity Value

Rental Home Equity Value in Washington

For owners, knowing the best time to sell their home is crucial. The same goes for rental properties. 

Over time, rental homes can gain high equity. This means that their value is worth more than their initial selling price. When this happens, it’s the perfect time to sell a rental property.

As Washington’s economy grows, the equity your rental property can gain will increase. In this case, you can earn more from selling than continuing to lease your real estate property.

2. Increase in Housing Demand

The amount of time it takes to sell a home in Washington depends on several factors, including seasonality and demand. 

In recent years, homes across the United States have been selling faster, taking an average of 25 days for a house to sell after being listed. This is quite evident in areas of Washington that are thriving and growing economically.

When there are more home buyers than sellers, many rental property owners take advantage of this momentum to sell at a higher price.

Rental Property Requires Costly Repairs in Washington

3. Rental Property Requires Costly Repairs

Tenants can cause minor damages like leaking pipes or faulty smoke detectors which can easily be repaired. However, major issues like damaged water, HVAC, or septic systems can be expensive to fix.

Moreover, if you have an old rental property with damages in its foundation or a mold problem, it’s more practical to sell it rather than spend more on these costly repairs. 

Real estate investors or cash buyers like Kind House Buyers are more than willing to buy such properties for a fair price.

4. Leased Real Estate is Inherited

There are also cases when the rental property is inherited by the owner’s rightful heirs. However, if they have no knowledge or interest in running a rental business, maintaining their inheritance can only get burdensome.

To avoid dealing with tenant problems, repairs, and taxes, selling the inherited rental property is a better option.

5. Unsteady Cash Flow From Rental Home

Getting a steady cash flow from your leased property is not always guaranteed. There are times when the cost of insurance, utilities, and taxes outweigh your profit, especially when the demand for rental properties is low.

Upon reevaluating your Washington rental’s status and seeing no decent profit for consecutive months, then it’s time to consider selling. 

6. Tenants Are Troublesome

Being a Washington landlord can be rewarding but also troublesome. Tenants can encounter different issues with the house or unit and even with co-tenants during their stay. 

Tenants may file endless complaints, show hostile behavior, and may not pay on time. Landlords need to be readily available to deal with their concerns and also put their foot down in case there are stubborn renters.

Being a Landlord in Rental Home In Washington

If tenant issues are taking a mental toll on you, just sell the rental property in as-is condition.

7. Being a Landlord Has Become Too Stressful

Aside from tenant matters, landlords also need to stay on top of tax payments, property maintenance, and other stressors like typhoons, earthquakes, and other calamities that could affect tenant safety.

If the stressful and time-consuming duties of a landlord are no longer worth the monthly rent payments of your tenants, selling could be a better alternative.

Preparing to Sell Rental Property in Washington

Have you decided to list your rental property in Washington for sale? If you are firm with your decision, here are a few things to consider and take care of before selling:

1. Know How You Want To Sell Your Rental Property

The first thing you need to decide when selling a rental property in Washington is how you want to do it. Here are some of your options:

  • Consider an FSBO Sale: If you have the time and energy, consider selling the rental property yourself (For Sale By Owner). Choosing this option means you’re in charge of listing, marketing, and doing all the paperwork required before, during, and after the sale.
  • Work With Real Estate Agents: Real estate agents can help you find interested buyers of your rental property, whether they are first-time home buyers or those who want to become landlords. However, convenience comes with a price since these agents require commission fees. You will also be required to shoulder renovation costs and other fees associated with the sale.
  • Sell To A Real Estate Investor: Selling your rental property to real estate investors or cash buyers is a great option if you sell your house fast and skip the hassle of selling in the traditional real estate market. However, one of the downsides is selling at a discounted value since these investors factor in rehabilitation costs.
  • Sell Your Property To A Tenant: Another viable option is to sell your rental property to a long-term tenant. If it will be difficult for them to move out, then they might consider buying the house from you through a lease-to-own agreement or seller financing

2. Set a Pre-Listing Home Inspection

Listing Rental Home In Washington

To get the best value for your rental property, arrange a pre-listing home inspection with a professional home inspector in Washington. They provide a detailed report of all the needed repairs to revamp your home to make it more appealing to potential buyers.

3. Find Out About Existing Liens on the Property

By consulting an escrow officer, you can determine if there are liens on your rental property. If there is an existing mortgage or cloud on the title, this could hamper your chances of selling.

Knowing if there are any liens on the leased property is important to avoid any pitfalls and ensure a smooth sale.

Navigating Lease Agreements and Tenant Rights

Once you’ve accomplished the preliminary steps and considerations, it’s time to inform your tenants about your plans to sell the rental property. The last thing you want is an uncooperative tenant.

To ensure transparency and good communication, you must consider your current lease agreements and your tenant’s rights. Here’s what you need to do:

1. Give Proper Notice To Your Tenants

According to tenant law, landlords are legally required to issue a notice to let tenants know ahead of time about your intention to sell the house. In Washington, a 90-day notice period should be given. This should include the following information:

  • Basic Information and Identification: This part includes the date the notice is written, the tenant’s name, and the address of the rental property.
  • Information About The Sale: This covers the intention of the notice, detailing when the rental property will go on sale and what the tenant’s role will be during the process.
  • Showing Notice: The notice should inform tenants about showing schedules so they can prepare beforehand. Consider their personal schedules as well to avoid further inconveniences. You should also state if they should leave the premises during showings.
  • Bonus Incentives: The notice should also state incentives that you will give to the tenant due to the inconveniences that the sale will cause.  You may offer rent rebates, cover moving expenses, or help them find a new rental place.

Aside from these details, you should also write in the notice that you will respect their privacy by limiting viewers throughout the listing period. Don’t put up signages outside the rental property to avoid disturbing the tenants during the day.

2. Honor Your Lease Agreement

Rental Lease Agreement In Washington

If your lease agreement doesn’t include an early termination clause or it’s a fixed-term lease, then your tenant is legally allowed to remain on the rental property until the lease expires.

To avoid any legal issues, you should wait until the lease expires before selling your house to a prospective buyer. It’s still possible to list the property while it’s still occupied as long as you give a notice to the tenant.

In some cases, the lease agreement will be transferred with the sale. For example, if your tenant still has five months left based on the contract, the future buyer will have to accept this agreement as part of the sale.

Meanwhile, if your tenant has a month-to-month lease, you have two options: renegotiate or terminate the lease.

Since there is no lease expiration date, you need to come up with an understanding with your tenant to renegotiate the terms. You can reduce rental fees or subsidize their last few months to convince them to move out on your specified date.

3. Consult a Real Estate Attorney

If you are baffled by Washington state laws regarding lease agreements and tenant’s rights, you should consult a real estate attorney for expert guidance and advice.

A real estate attorney can also help you clear out any issues with your tenant to avoid court hearings while selling your rental property. They can also help you legally terminate a lease if your tenant is uncooperative.

Note: If the tenant refuses to accept your proposed financial incentives and continues to stay on your property beyond the lease termination date, you can start a legal eviction process in your local county.

Tax Considerations When Selling Rental Property in Washington

Similar to any real estate property, selling a rental home or unit incurs taxes. If you’re a newbie landlord, you may be unfamiliar with the tax payments required after a successful sale. 

Here’s an overview of the taxes you need to pay in Washington state:

Depreciation Recapture Tax

Depreciation recapture is a tax provision allowing the Internal Revenue Service (IRS) to collect taxes upon the sale of a rental property, meaning that the gain or profit from the sale must be reported and taxed as ordinary income.

The tax rate for real estate properties is currently capped at 25%, which still depends on the tax bracket of the rental property owner. One way around depreciation recapture is to sell your home for less, which could be less favorable.

Capital Gains Taxes

Rental Homes Taxes in Washington

Capital gains are also collected by the IRS after the sale of rental property in Washington. It is calculated by getting the difference between the initial cost of the rental property (plus other acquisition costs) and its current purchase price.

The capital gain tax rate depends on the duration of your ownership of the rental property. There are two categories as highlighted below:

  • Short-Term Capital Gains Tax: If the rental property has been owned for a year or less, it will be taxed as short-term capital gains. This means that the rate is calculated according to your tax bracket, which ranges from 10% to 37%.
  • Long-Term Capital Gains Tax: Meanwhile, if the rental property has been owned for more than a year, long-term capital gains tax applies. This has a much more favorable rate:
    • 15% for joint filers with taxable income ranging from $80,800 to $501,600
    • 20% for joint filers with income above $501,600

Note: If your yearly taxable income is below $80,800, you are not required to pay capital gains tax.

How To Prevent a Tax Hit When Selling Your Washington Rental Property

Tax payments can indeed take a chunk of your profits after the sale. Luckily, there are several ways to prevent a tax hit when selling a rental property in Washington state.

1. Leverage Section 1031: Tax Deferred Exchange

Rental Cash Home Buyer In Washington

According to Section 1031 of the Internal Revenue Code, also called 1031 exchange, a rental property owner can defer capital gains taxes by using the sale proceeds from the rental property to buy a replacement property of the same or higher value.

For example, an owner can sell their unit or home and buy a condominium at the same time as long as both properties are used for rental business.

However, one main disadvantage is that the process of finding a replacement property must be completed within 45 days, and the deal should be closed within 180 days.

If a tax return must be filed before the 180-day period, the sale of the new property must be closed at an earlier date. If you miss these deadlines, you will be required to pay hefty capital gains taxes.

2. Take Advantage of Section 121: Primary Residence Exclusion

Another common way to get a tax break from selling a rental property in Washington is to convert your rental property into your primary residence. 

To qualify, the owner must live in the property for at least two years within the five years you have owned it before the sale. However, their stay doesn’t have to be consecutive. This is called the 2-in-5-year rule.

If the owner’s civil status is single, they may be granted up to $250,000 tax exclusion from the profit of the sale. On the other hand, if the owner is married, they are entitled to a $500,000 tax exclusion.

However, since the rental property is now considered a personal residence, you can’t be excluded from the depreciation recapture tax.

3. Utilize Tax-Loss Harvesting To Offset Gains With Losses

Sale of Your Rental Property in Washington

Tax-loss harvesting is another tactic used by owners in Washington who want to sell their rental properties. This works by pairing the profit from the sale with a huge loss on other real estate investments to reduce tax payments.

For example, if the owner gained $70,000 from the sale of their rental property but has a negative equity of $40,000 from another real estate, then the loss will be subtracted from the gain. In this case, only $30,000 will be taxable by the state.

Finalizing the Sale of Your Rental Property

Once you’ve navigated tenant rights, pre-sale preparations, and tax implications, it’s time to finalize the sale of your rental property in Washington. 

Start by reviewing and addressing any contingencies tied to the buyer’s offer, such as repairs or inspections. This ensures the property is in sellable condition and minimizes potential issues at closing.

Next, work with a real estate attorney or agent to handle the closing paperwork. This includes the purchase agreement, title transfer, and final financial transactions. Ensure that all necessary documents are signed and funds are properly disbursed. 

After closing, notify your tenants (if any) of the change in ownership and coordinate any final steps regarding their relocation or lease transfer. Congratulations—your property sale is now complete!

Key Takeaways: Successfully Selling Your Rental Property in Washington

Selling a rental property in Washington requires careful planning, an understanding of the market, and knowledge of key legal considerations, such as whether you need to sell your house fast in Seattle or Tacoma or even in Spokane or other parts of Eastern Washington.

First, assess the timing and reason for your sale, as well as the current housing demand. Preparing your property by conducting pre-listing inspections and ensuring compliance with local laws is essential for a smooth transaction.

Additionally, navigating tenant rights and lease agreements is crucial to avoid disputes during the sale process. 

Lastly, tax implications, including capital gains and depreciation recapture taxes, should be factored in to optimize profits. By being proactive and seeking professional advice, you can ensure a successful and profitable sale.

If you want a hassle-free sale of your rental property in Washington. These guidelines are relevant statewide, covering cities like SeattleTacomaSpokaneYakimaVancouverBellingham, and their surrounding areas. Send a message to Kind House Buyers! Call us today at (253) 216-2497 to learn more!

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Keith Sant Owner Of Kind House Buyers

Author: Keith Sant

Keith Sant is a real estate investor and entrepreneur who enjoys helping others by sharing useful real estate information. Keith’s goal is to educate home sellers so they can make the best decisions for their real estate problems. When Keith is not working, he enjoys cycling and traveling with his wife, Krixelle.

He has been featured on numerous new and real estate platforms, including Zillow, HomeLight, Better Homes & Gardens, Realtor.com, MSN, and Yahoo Finance.