Over the past five years, real estate prices in Utah have increased significantly — up 47.5 percent, according to the Federal Housing Finance Agency. In the Ogden-Clearfield metro area, house prices have increased slightly more, up about 48.5 percent during that same time.

With gains like that, some real estate investors may be wondering when is the right time to cash in and sell their investment property. Real estate investing has tremendous benefits so knowing when to sell can be a tough and complicated decision, often without a clear right and wrong answer.

Here are some things to consider as you decide whether or not now is the right time to sell.

Is the property making money?

If your property is consistently losing money or barely covering your monthly expenses, that might be a sign it’s time to sell. Perhaps the location is not conducive to rentals or the maintenance costs are resulting in consistent negative cash flow. If you anticipate significant repairs in the near future, that may also be a sign that it’s time to move on.

The return on the property may have changed as well. If the property has significantly increased in value but rents haven’t increased proportionately, that may be a sign that it’s time to cash in.

To calculate the property’s anticipated annual return, start by determining the net income by subtracting the anticipated annual expenses of owning the property from the annual revenue. Then divide the net income by the current market value of the property to calculate the expected return on investment.

If your return is low and you think you can make more money through other investments or through another property more suited to rentals, it may be time to look at selling.

What are the tax consequences?

When you sell a primary residence, you get up to $250,000 in gain tax-free for singles and $500,000 tax-free for taxpayers who are married filing jointly.

Unfortunately, this is not the case for investment properties, and you will incur federal and state capital gains taxes. Essentially, the government will tax you on the sale proceeds minus your purchase price adjusted for improvements, depreciation and other items.

Real estate investors will pay a higher tax rate on accumulated depreciation deductions with the remainder of the capital gain taxed at the more favorable federal rates of 0, 15 or 20 percent, depending on income.

For many investors, cashing out can come with a significant tax burden. Make sure to talk to your tax advisor to determine the potential tax consequences of a sale and strategies for reducing that bill.

Are you planning on buying another property?

Real estate investors can delay the tax consequences of selling rental property by using a 1031 exchange. This allows you to sell your rental and replace it with another “like-kind” investment property.

This may be a good strategy especially for those interested in buying a different rental property. Essentially, you use the funds from one property to help buy the other — all while deferring the payment of taxes. You can use a 1031 exchange as many times as you want. When you finally decide to cash out, taxes will be due.

There are strict timing requirements so make sure to consult with your attorney, accountant and 1031 exchange intermediary to learn more about whether this strategy works for you. You have 45 days after the sale of your property to find another, and you must close on the new property within 180 days.

The decision to sell an investment property is a very complicated one. Make sure you’re working with the appropriate experts, including your attorney, tax professional and Realtor, who can help you make the most educated decisions.

Robert Bolar is president of the Northern Wasatch Association of Realtors.

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