Selling an Investment Property
By Emily Southey | 15 minute read
Are you looking to sell your investment property? Unfortunately, unlike a stock or mutual fund, real estate is one type of investment that can’t be sold with a few clicks of a button. In fact, selling an investment property can be an intimidating process, especially if you’ve never done so before. Luckily, the experts at Wahi are here to help ensure the sale of your investment property goes off without a hitch.
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What Is an Investment Property?
An investment property is a piece of real estate purchased to generate income. Income can be earned either through rental income or simply by appreciating in value. Investment properties can be bought by a single buyer, a pair of buyers, or a group of investors.
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Key Considerations Before Selling Your Investment Property
If you’re wondering when you should sell an investment property, you will need to consider several key factors. Before putting your property on the market, we suggest that you ask yourself the following questions:
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Is your investment property a rental property? And if so, do you have a current tenant, and did you recently sign a new lease?
If your investment property is a rental property and a tenant currently lives there, you’ll have to consider this decision from many angles. First, you must ensure that the sale of your investment property doesn’t interfere with the tenant’s rights. For example, in Ontario, tenants have many rights. If they’ve signed a lease and the lease has not yet expired, they have a right to remain there under Ontario’s Residential Tenancies Act. If you still want to proceed with the sale, you must know that the lease will transfer with the property, and you will have to make any prospective buyers aware of this. In addition, showing the property with a tenant is a little more complicated as you must provide a minimum of 24 hours’ notice before each visit. Typically, the best case scenario for selling a rental property is to wait until the current tenant’s lease is up.
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Are you prepared to pay the tax on your capital gain?
Another consideration when deciding whether to sell your investment property is capital gains tax. All investment property sales in Canada are subject to capital gains tax. Capital gains tax is a general tax paid to the Canadian government when you make a profit from selling something of value (for example, a stock, bond, or real estate). Capital gains tax is only applicable if you earn more from the sale of your property than you paid originally. For example, if you bought a condo in Toronto for $600,000 in 2016 and sold it for $850,000 in 2021, your capital gains would be $250,000, and you would be legally required to report this amount on your income tax return. Before putting your investment property on the market, we suggest using a capital gain calculator to figure out how much tax you will owe on the property sale.
“An investment property is a piece of real estate purchased to generate income. Income can be earned either through rental income or simply by appreciating in value. Investment properties can be bought by a single buyer, a pair of buyers, or a group of investors.”
What are your lifestyle goals?
Any time you’re thinking about selling real estate, it’s important to consider your lifestyle goals. Try to remember what your goals were when you initially purchased the property. Consider the demands of your day-to-day life. For example, if you got married or started a family since you bought the property, you may no longer have the time to keep up with the demands of being a landlord. Alternatively, if you had certain financial goals in mind when you purchased the rental property, and you’ve now met those financial goals, it could be a sign to sell and move on to another investment project. Finally, if you’re simply tired of being a landlord or owning a rental property that hasn’t lived up to your expectations, these could also be reasons to sell. Ultimately, think about whether continuing to own a rental property aligns with your lifestyle, both in the present and future.
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What are your retirement income needs?
Finally, before selling your investment property, consider your retirement income needs. There are plenty of retirement income calculators online. Take advantage of these and determine how much you need to be earning now to live comfortably in retirement. You may discover that the income from your rental property isn’t really needed to reach your retirement goals, in which case, selling could be the perfect option for you.
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A Step-By-Step Guide on How to Sell an Investment Property
If you’ve considered the factors above and still feel ready to sell your property, follow the step-by-step guide below.
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Step 1: Review tenant rights and obligations
The first step if you’re selling a rental property with a current tenant is to review the tenant rights and obligations in your province. As mentioned, Ontario tenants have extensive rights until the Residential Tenancies Act. If the tenant’s lease has yet to expire, you do not have the right to evict them simply because you want to sell the property. Therefore, you would need to market the property as a rental property, and once purchased, the lease obligations would transfer to the new owner. In addition, you must provide your tenant with a minimum of 24 hours’ notice before every showing.
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Step 2: Find a REALTOR®
Choosing a REALTOR® is the next step in the investment property selling process. Ideally, you should look for a REALTOR® with experience selling rental properties. They are likely to have a network of investors they can market the property to and will have a firm grasp of tenant and landlord rights.
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Step 3: Stage your investment property
As a landlord in Ontario, you don’t have the right to stage your tenant’s home. You also can’t force them to do anything to their space, such as clean it or rearrange the furniture. That said, you do have the right to make minor repairs, so this could be a good opportunity to wash the carpet, repaint, or change the light fixtures. Alternatively, if the investment property is vacant, you can stage it however you like, and your REALTOR® can help.
Step 4: Scheduling showings
When selling any type of property, you must be prepared for prospective buyers to visit. Try to be as flexible as possible with the showing schedule. However, keep in mind that if you have a tenant, you must give them at least 24 hours’ notice before a showing.
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Step 5: Calculate the estimated capital gains tax
As mentioned, you are required to pay capital gains tax after selling an investment property. To avoid any unfortunate surprises, we recommend calculating your estimated taxes beforehand. In Canada, sellers are only required to pay tax on 50% of the realized profits. This means that only half of the money you earn from the sale is taxed. To calculate the capital gains tax on your investment property sale, subtract the adjusted base cost (ABC) of the property from the selling price, and then divide that number in half. The sum is the amount subject to capital gains tax. (To calculate your adjusted base cost, add the original purchase price of the property, plus the cost of any legal fees, tax commissions, and renovations.) The capital gains taxes owed will also depend on factors like your income bracket and the province or territory you reside in.
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Six Tips for Selling Investment Property
Ensure the process of selling your investment property goes off without a hitch by following the tips below.
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1. Research the local market
If you own a property solely for rental income purposes, then when you put it on the market might be flexible. In this case, it’s critical to research the local housing market so you can strategically time your investment property sale. Pay attention to real estate prices and rental vacancy rates to help determine whether the local market is hot, cool, or somewhere in the middle.
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2. Maximize your property’s rental income
One of the biggest perks of owning an investment property is the additional income stream. Therefore, before you sell your property, maximize the rental income. If you’re thinking of selling soon but aren’t quite ready, make sure to increase your rent prices annually. Since the lease will transfer to the new owner, the amount of rent paid by the tenant directly impacts how much you will get for your property.
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3. Find a REALTOR® with investment property experience
When hiring a REALTOR®, find one with investment property experience. A REALTOR® that specializes in investment property can offer insights on the tax implications of selling an investment property or rent trends in your neighbourhood. They may also have a network of investors to market the property to and be able to provide an accurate projected return on your investment.
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4. If possible, vacate the property before selling
In an ideal world, the property would be vacant before selling, simply because it’s far more convenient to sell a vacant property (it might also be easier since you have complete control over the staging and marketing). Buyers also tend to feel more comfortable purchasing an empty property and renting it out on their own terms to tenants who they have personally vetted. Therefore, if possible, we suggest waiting until your current tenant’s lease has expired to put your investment property up for sale.
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5. Use a good tenant to your advantage
In the event that you must sell your investment property with a tenant, use a good tenant to your advantage. A good tenant, who might be hard to come by in your neighbourhood, could be a selling point that attracts a buyer, especially if they don’t have the time or energy to find a tenant of their own. If you’re selling a tenanted property, it will likely be marketed to investors as opposed to the average homebuyer. Be prepared to answer questions about the tenant from investors, such as:
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- How long has the tenant occupied the property?
- How much is the monthly rent?
- Does the tenant pay their rent on time?
- What utilities are included in the rent, if any, and what utilities are the tenant responsible for?
- Does the tenant take good care of the property?
- When does the current lease expire?
- Are there any security deposits with the lease?
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6. Get advice from tax professionals who understand rental properties
Our final piece of advice for selling an investment property is to consult with a tax professional. As mentioned, the tax implications of investment property sales are considerable. In particular, understanding how capital gains tax works in Canada is vital if you want to sell your rental property. A tax professional or even a tax lawyer can help you understand the various tax implications of selling an investment property. They can also give you advice on how to reduce how much tax you pay. For example, a few tips on how to minimize the amount of capital gains tax you pay on your investment property sale are as follows:
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- Put your property on the market when your income is the lowest: Since your capital gains tax rate partially depends on your tax bracket, you might find it beneficial to hold off on selling your property until your income level goes down (for example, if you’re taking parental leave soon and will be earning a reduced income). If you wait, you are likely to pay less capital gains tax, saving you money.
- Hold investments in tax-advantaged, registered bank accounts: Holding investments in tax-advantaged accounts has many benefits, including reducing or deferring the capital gains tax owed on an investment property sale. For example, if you hold an investment in a Tax-Free Savings Account (TFSA), you are not required to pay tax on any gains you earn from this investment (however, there is a contribution limit). Another type of account that may be beneficial to real estate investors is the Registered Retirement Savings Plan (RRSP). RRSPs typically offer tax-free contributions and withdrawals, as well as tax-deductible contributions and tax-free growth.
- Leverage capital losses: One final tip for minimizing how much you pay in capital gains tax is to leverage capital losses. The Canada Revenue Agency (CRA) allows taxpayers to use their capital losses to offset capital gains. So if you recently suffered a capital loss (for example, you lost money because your primary residence, or other investment like a stock, depreciated in value and sold for less than you originally bought it), you can use this to your advantage. As with a capital gain, a capital loss is only realized once the asset is sold, meaning it must be sold to offset a capital gain. What’s more, if you don’t have any capital gains to offset in the same year you suffered a capital loss, you can apply your capital losses to any capital gains made in the past three years. However, to take advantage of this method, you would need to amend your prior tax bills. Another option is to carry forward your capital losses to reduce future capital gains.
Frequently Asked Questions
When should I put my investment property on the market?
When you should list your investment property depends on many factors. First, do you currently have a tenant, and if so, does their lease expire soon? If the answer is yes then it might be best to wait until the tenant has vacated the property before selling. This will make staging, showing, and ultimately selling the property much easier than trying to do so with a tenant. Other factors that may influence when you put your property on the market are your financial goals and the state of the real estate market. Your personal financial goals (which should include your retirement goals) must be considered. Ask yourself questions like “Do you need the equity from the sale for other purposes?” “How would my taxes be impacted by the property sale?” and “Do I need this additional income stream to meet my retirement income goals?” Answering questions like these can give you an idea of whether selling your investment property now makes financial sense. Next, be sure to consider market conditions before putting your property up for sale. Specifically, look at trends relating to housing prices and vacancy rates in your area. To help you determine whether the current housing market will work to your advantage or not, consider the following:
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Unemployment rates in your neighbourhood: The health of the local employment market directly relates to the local real estate market. Research the current unemployment rate in your area and find out how that rate compares to past years.
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New build projects: If real estate prices have been steadily rising, then chances are there are a number of new build projects in the works. Selling your property before these pre-construction properties are completed might be ideal, as more properties on the market could lead to a drop in prices in the near future.
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The number of homes for sale: Generally speaking, the fewer properties that are on the market, the more luck you’ll have with your home sale. Low inventory-high demand is what’s known as a seller’s market, which is the ideal environment in which to sell an investment property.
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Available land: As all new build properties need land to be constructed on, the amount of available land in your neighbourhood can impact housing prices. Typically, the less land that’s available, the more current housing prices are driven up.
If I have tenants, what happens? Can I evict them?
Tenant and landlord laws vary by province. However, in most cases, you cannot legally evict an existing tenant if their lease is still valid. Therefore, if you have tenants, you will need to notify them that you intend to sell the property and make sure that you read up on the laws surrounding the sale of tenanted properties. In Ontario, the Residential Tenancies Act details the various rights and obligations that both parties have. For example, a landlord can sell a rental property that has a tenant but they cannot evict them, meaning if the property is sold, the lease obligations transfer to the new owner until the end of the lease term. Further, if the tenant is month-to-month, the new property owner is entitled to move into the space with a minimum of 60 days’ written notice. The new owner must also occupy the space themselves or rent it to a family member. It is illegal to evict the tenant and rent it to someone else. In regards to showing the property to prospective buyers, tenants are obligated to co-operate with showings. However, they must be given 24 hours’ notice before each showing. Please note that tenants in Ontario are not required to clean, declutter, rearrange furniture, or do anything to the space before the showing and the landlord cannot do it on their behalf. This could make it more difficult to sell the property as it likely won’t be staged.
Is inflation a consideration when deciding whether or not to sell my investment property?
Inflation is one factor that might be worth considering when deciding whether or not to sell your investment property. Generally speaking, high inflation drives prices up, which could translate to higher rents and purchase prices. Therefore, if you choose to sell during a period of high inflation, you could get more for your rental property. However, if you intend to sell your rental property and then buy a new one, you may have to pay more for the new property due to inflation.
What conditions must be met before selling rented properties?
There are no conditions that must be met before selling a rental property if there is no current tenant. However, if there is a tenant, then there are a number of conditions that a landlord must abide by. For example, they must notify the tenant in writing they are selling the property, give the tenant a minimum of 24 hours’ notice before each showing, and they cannot evict the tenant if they have a valid lease (meaning the lease would automatically transfer to the new owner).
On the other hand, there are many reasons that REALTORS® and sellers continue to favour open houses. Open houses offer a more relaxed environment for prospective buyers to tour the home. They also generate foot traffic, and the heavier the traffic, the more likely it is that a serious buyer will schedule a follow-up visit.
Should I sell my investment property or keep it?
The decision of whether to sell your investment property or keep it depends on all sorts of factors, ranging from the housing market and vacancy rates in your neighbourhood to your personal financial and lifestyle goals.
Emily Southey
Wahi Writer
