You bought it in 1998, rented it out ever since, and now you are finished. The mortgage went years ago and the rent has been reliable, so this ought to be the easy one. Then you speak to an accountant about the tax and the number is not what you assumed, and a contractor points out that twenty five years of tenants have used the house rather than lived in it.
This article covers the tax that surprises long-term landlords, why a rental in decent condition still shows its history, what to do about the tenant, and how to decide between fixing it and selling it as it stands.
We buy rental property, so read the last section knowing that. We are not accountants and nothing here is tax advice. The tax treatment of a long-held rental is genuinely complicated, the numbers move, and the difference between getting it right and wrong is large. Speak to a CPA before you list it, not after you have accepted an offer.
The tax that surprises people
Ask your accountant about this before anything else, because it can change whether you sell at all.
Every year you owned the rental you were entitled to a depreciation deduction, and it reduced your taxable income. When you sell, that benefit is accounted for. Under the federal rules the depreciation you took, or were entitled to take, is treated as unrecaptured section 1250 gain and taxed at a maximum rate of twenty five per cent, separately from the rest of your gain.
The phrase that catches people is "or were entitled to take". Not claiming depreciation does not avoid this.
Two more points worth raising with a CPA:
The principal residence exclusion probably does not help. It requires the property to have been your main home for two of the last five years, which a long-term rental has not been. And even where it applies, it does not shelter depreciation recapture.
A section 1031 exchange defers rather than removes. For investment property, exchanging into another investment property can defer the gain, but the rules on timing and identification are strict and unforgiving. It is a decision to make before you have a buyer, not after.
None of that is advice. All of it is a list of questions to take to somebody qualified. Our net proceeds calculator handles the sale costs, and your accountant handles the rest.
Twenty five years of being used rather than lived in
A well-maintained rental is still a rental, and an inspector reads it in about ten minutes.
What accumulates is not damage so much as deferral. Landlord-grade repairs that solved the immediate problem. Finishes chosen to survive rather than to appeal. Systems kept running rather than replaced, so the heating, the water heater and the roof all reach the end of their lives at roughly the same time. Our articles on what a turn actually costs and what a home inspector checks cover both sides of that.
Then there are the items specific to age rather than use. In a house of that vintage, ask about the electrical panel, the plumbing material, the insulation and any work done before you owned it. Our articles on electrical panels and polybutylene and galvanised plumbing cover the two that most often stop a sale.
Get an inspection of your own before listing. On a long-held rental it is the single best money you will spend, because it converts a negotiation you will lose into a list you can price.
The tenant question
You have three routes and they are worth about different amounts.
Sell with the tenant in place. Fastest, no vacancy, and it narrows the buyer pool to investors, who buy on the numbers rather than the kitchen. Our page on selling a rental property in Tulsa covers this and our article on selling a tenant-occupied house covers the mechanics.
Wait for the lease to end. Then sell empty to owner-occupiers, which is usually the higher price, at the cost of the vacancy and the turn.
Agree an early departure. A written agreement, sometimes with a payment, which our article on cash for keys covers. Frequently cheaper than the months a dispute costs.
What you cannot do is treat the tenant as an inconvenience. Their rights do not change because you have decided to sell, and access for showings is governed by the notice rules, which our article on Oklahoma landlord notice requirements covers.
The paperwork that adds value
Investors buy documented income. Assemble it before you market:
- Leases, the rent roll and a payment history
- Deposits held, and the account they sit in
- Maintenance and capital expenditure by year, which shows what has been replaced
- Utility and tax bills, and the insurance history including claims
- Permits for any work done
- Your own inspection report
A landlord who produces that file in week one is negotiating from a different position from one who produces receipts on request.
Timing, and the thing landlords get wrong about it
Two clocks matter and they pull in opposite directions.
The tax year. Which year a sale closes in affects when the gain and the recapture land, and a sale closing in January rather than December can change what you pay and when. That is a conversation with the CPA rather than a reason to rush or delay by itself.
The lease. Selling occupied is fastest and selling empty is usually dearer, so the end of a lease is the natural hinge. A landlord who starts planning three months before a lease ends has all three routes available. One who starts the week a tenant gives notice has fewer.
The mistake is treating the decision as a single moment. On a property held for decades, the sensible order is: accountant first, then your own inspection, then the tenant conversation, then the market. Reversing that order is how people end up accepting an offer they then discover they cannot afford to take.
Where we come in
If the house is in decent order and you can accept a vacancy, list it empty. Owner-occupiers pay more than investors for the same house, and the difference on a long-held rental with real equity is usually far larger than a turn costs. That is the higher number and we will tell you so.
Where a cash sale genuinely fits: the deferred maintenance has arrived all at once and you are being asked to fund a renovation on a property you have already decided to leave, the tenant will not cooperate, you are managing from out of state, or you want the whole thing finished in one transaction rather than staged over a year. Our article on being an out-of-state landlord covers the third of those.
Whichever route you choose, speak to the CPA first. On a property held since the nineties the tax question is frequently larger than the difference between any two offers, and it is the one thing on this page that nobody can fix afterwards.
The short version
- Depreciation taken, or that you were entitled to take, is treated as unrecaptured section 1250 gain and taxed at a maximum rate of twenty five per cent
- The principal residence exclusion needs two of the last five years as your main home and does not shelter depreciation recapture
- A section 1031 exchange defers rather than removes, and its timing rules are unforgiving. Decide before you have a buyer
- A long-held rental shows deferral rather than damage, and the systems tend to reach the end together
- Get your own inspection before listing. It converts a negotiation into a list
- Three tenant routes: sell occupied, wait for the lease, or agree an early departure in writing
- Investors buy documented income. Assemble the file first
- Empty to an owner-occupier is usually the higher price
- Speak to a CPA before listing, not after accepting an offer
Frequently asked questions
What is depreciation recapture?
When you sell a rental, the depreciation you took over the years is accounted for. Under the federal rules it is treated as unrecaptured section 1250 gain and taxed at a maximum rate of twenty five per cent, separately from the rest of the gain.
I never claimed depreciation. Does that help?
Generally no. The rules refer to depreciation taken or that you were entitled to take, which is exactly the phrase that catches long-term landlords. Ask a CPA.
Can I use the home sale exclusion?
It requires the property to have been your main home for two of the last five years, which a long-term rental has not been. Even where it applies it does not shelter depreciation recapture.
What about a 1031 exchange?
For investment property it can defer the gain by exchanging into another investment property. The timing and identification rules are strict, so it is a decision to make before you have a buyer.
When should I speak to an accountant?
Before you list, not after you accept an offer. On a property held since the nineties the tax question is frequently larger than the difference between any two offers.
Is a well-maintained rental the same as a well-maintained home?
Rarely, and an inspector reads the difference quickly. What accumulates is deferral: repairs that solved the immediate problem and systems kept running rather than replaced.
Why do all the systems fail at once?
Because they were all kept going rather than replaced, so the heating, water heater and roof reach the end of their lives at roughly the same time.
Should I get my own inspection?
On a long-held rental it is the best money you will spend. It converts a negotiation you would lose into a list you can price.
Should I sell with the tenant in place?
It is fastest and avoids a vacancy, but it narrows the buyer pool to investors who buy on the numbers. Empty to an owner-occupier is usually the higher price.
Can I make the tenant leave so I can sell?
Not outside the lease and the notice rules. Their rights do not change because you have decided to sell, and showings are governed by the notice requirements.
What is cash for keys?
A written agreement, sometimes with a payment, for a tenant to leave by an agreed date. It is frequently cheaper than the months a dispute costs.
What paperwork will an investor want?
Leases, rent roll and payment history, deposits held, maintenance and capital spending by year, utility and tax bills, insurance and claims history, permits, and an inspection.
Does a documented file actually change the price?
It changes the negotiation. A landlord producing the file in week one is in a different position from one producing receipts on request.
What are the two things most likely to stop a sale on an older house?
In practice the electrical panel and the plumbing material. Both have articles on this site and both are worth establishing before a buyer's inspector does.
What happens to the security deposits?
They are accounted for at closing and transfer with the tenancies. Have the figures and the account details ready rather than reconstructing them later.
Do I have to disclose problems on a rental?
The disclosure obligations apply to you as seller regardless of who has been living there. What you know goes on the form.
Is it better to renovate first?
If the house is fundamentally sound and you can fund it, usually yes, because owner-occupiers pay more than investors for the same property. If the deferred maintenance has all arrived at once, that changes.
I live out of state. Does that change things?
It changes the arithmetic considerably, because managing a renovation and a listing remotely is expensive in both money and time.
Can I sell part of a portfolio?
Yes, though the tax treatment of each property differs and the order can matter. That is another question for the CPA before anything is listed.
Do you buy tenanted rentals?
Yes, with tenants in place and with deferred maintenance in place, and we do not ask you to empty or repair it first.
When should I not sell to you?
When the property is in decent order and you can accept a vacancy. List it empty to owner-occupiers and you will net more.
What is the single biggest mistake here?
Deciding the price before speaking to an accountant. Everything else on this page can be fixed afterwards. That one cannot.
We buy rental property, so read the last section knowing that. We are not accountants and nothing here is tax advice. The treatment of a long-held rental is genuinely complicated and the numbers move. Speak to a CPA before you list it, not after you have accepted an offer.