When Is The Best Time To Sell Rental Property? Three Targets To Consider For Maximum Profits

Rental Property On Santorini CliffShould I Sell My Rental Property And Simplify Life?” was written in frustration due to unnecessary conflict between my tenants and their downstairs neighbor. I’ve had some time to think more objectively about the incident as well as talk to a couple older landlords to come to a more rational decision which I will share in this post.

When I had no online income, real estate income was by far my favorite income stream. Now that my online income has grown, I’m becoming obsessed with the idea of being as unencumbered as possible to make money. Early retirees become totally spoiled with our time because we never have answer to anybody. So when we have to do something that’s unpleasant, such as play peace keeper, we get very bummed out. (Read: “What Does Early Retirement Feel Like? The Positives And Negatives“)

As you know from previous articles, I spend an exorbitant amount of time doing research on anything that has large financial consequences. I calculate various scenarios, talk to friends and family, and speak to as many industry veterans as I can find. After consulting with several 55+ year old rental property owners who’ve owned their properties for over 25 years and comparing notes, I’ve come up with three tangible targets to determine the best time to sell rental property.

Math not emotion is what’s going to help make the best financial choices!


The base case assumption is that we should own our property forever. Rents will continue to rise due to population growth and inflation, while land is finite. Every time I think about selling a piece of property to simplify life, I think about how I’ll be kicking myself 10, 15, 20, 25 years from now for selling so cheap. Just think back to where rents or property prices were just 10 years ago and I’m sure you’d agree.

Real estate almost always seems expensive at the time of purchase because real estate is almost always the largest asset you’ll buy in your life time. Unless you’re really disciplined by buying below your means, you’ll generally tend to buy what you can afford or stretch to the max instead.

As we get older and hopefully wealthier, time becomes more of a premium over money. Rental property is the most active of my passive income streams, but the ideal scenario is to earn lots of money and seriously do nothing at all. The problem with totally inactive money is that CD returns are too low while stocks and bonds can turn violent in any given year.

If we can’t hold onto the property forever by at least hiring a property manager for one month’s rent as pay, then we should consider holding on until one or all of the following three targets are met.

1) When your depreciation benefit runs out. Depreciation is a non-cash expense which every rental property owner can take. You can usually either accelerate your depreciation or straight-line depreciation. The most common form of depreciation is the straight-line depreciation method which is taken of an IRS instituted 27.5 years.


1. Purchase price – Land Value = Building Value.
2. Building Value / 27.5 = Annual allowable depreciation deduction.


1. $500,000 purchase price – $200,000 land value = $300,000 building value

2. $300,000 building value / 27.5 = $10,909 annual allowable depreciation deduction.

3. Current annual rental income is $20,000 (4% gross rental yield).

4. Taxable rental income if we include no other costs like property tax, maintenance, and HOA costs for simplicity purposes = $20,000 – 10,909 = $9,091.

5. Total tax savings if you are in the 25% federal tax bracket = $10,909 X 0.25 = $2,727.

Deprecation expense is all about saving on taxes. You may be able to select accelerated depreciation instead, which basically front loads the depreciation costs to get a bigger deduction. Best to check with your accountant and state laws. Here is the IRS page on depreciation which doesn’t do a very good job explaining because it is so damn long and confusing!

The depreciation criteria basically states that you should aim to hold on to your property for the amount of years you are allowed to depreciate. While I was in the 36% federal tax bracket (39.6% current equivalent), I maximized depreciation and all my rental expenses so that I was making a net loss on my main rental property. Now that I’ve started a company and make less reported income, I’m much more willing to earn income from my rental given my lower tax bracket.

It’s important to note that depreciation amounts get adjusted back during time of sale (aka depreciation recapture). For example, if you took 20 years of depreciation at $10,909 a year, you would reduce your cost basis of the $500,000 purchase price by $218,180 (10 X $10,909) = $281,820. With a lower cost basis, you would pay more taxes due to a higher difference in sales price vs. adjusted cost basis. Depreciation isn’t free money in the end. This is why you need to be proactive in your estate and tax planning.

One final point. Once you exceed $150k AGI (married filing jointly) you lose all rental losses as rental is considered a passive activity. You still accumulate the Net Operating Losses until you dispose of the property, or when your income is below that threshold. But you will not get any tax benefit on an annual basis. Hence, when it’s time to sell, make sure you make less than $150,000!

3) When you can tap your 401(k) or IRA at age 59.5. Hopefully everyone will have amassed a healthy chunk of wealth in their 401(k) or IRAs by age 59.5. Please see “How Much Should I Have In My 401(k) By Age” and “How Much Should I Have Saved In My IRA By Age” for some progress guidelines. The idea is to receive the income and taxation benefits of a rental property until the age where you can withdraw from your 401(k) or IRA penalty free.

As of now, there is a 10% early withdrawal fee on your 401(k) or IRA. The idea is to let your money compound over time and not let people give into the temptation of always feeding an emergency. A perfect time to buy rental property is therefore around the age of 32 due to the 27.5 years of straight-line depreciation. By the time you are 59.5, you can probably sell your rental property for a handsome profit, start taking penalty free withdrawals from your 401(k) and IRA and live a carefree life!

3) When you can begin collecting Social Security and Medicare. You’re welcome to delay the sale of your rental property if you can hold out long enough for Social Security. The earliest you can currently start accepting Social Security is age 62. I’d be more conservative and expect the earliest age to accept to increase to 65 by the time you retire.

Receiving rental property income while receiving distributions from your 401(k) and IRA for the next two to five years isn’t a bad idea after age 59.5. By 65, I’m sure most of us will really want to simplify life and do as little as possible to make money. If I’m thinking of simplifying life after 10 years of rental property ownership at age 36, I know I’ll be longing for a simpler life 30 years from now!


Rental property should be a core part of anybody’s passive income stream portfolio. I’m a big believer in having an equal distribution of rental property, stocks, and bonds/CDs/risk-free assets making up one’s net worth. Read “Net Worth Allocation Recommendation By Age And Work Experience.” You’ve essentially got two parts offense that makes up 60-70% of your net worth, and one part defense (CDs) which can turn to offense when buying opportunities arise.

There will come a point in every rental property owner’s life where they just don’t want to deal with even a innocuous e-mail inquiry from a tenant anymore. Although I’m only in my mid-30s, I’m living more like a typical empty nest 65 year old retiree. The other mathematically right time to sell is when the property’s cap rate is sustainably lower than the risk-free rate. But these figures are constantly moving and it’s not easy time.

I’m still considering selling one rental property before I relocate to Hawaii. However, now that there are exact ownership targets (the number of depreciation years left, age 59.5, and age 62), I’m going to do my best to own for at least 17.5 more years until my depreciation runs out. Building passive income really is like a game and I love this newfound challenge!

Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. Interest rates are back down to ALL-TIME lows in 2015 due to tremendous volatility and uncertainty in the markets. Just be aware that the Fed is signaling an increase in interest rates by 2016 due to tightness in the labor market and rising inflation indicators. When banks compete, you win.

Updated on 6/22/2015



Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

Subscribe To Private Newsletter


  1. says

    Thanks for this reasoned assessment, Sam. I wondered if you were really going to jump the gun in selling one of your properties after that last post.

    I own one condo in D.C. now and am looking for another one to purchase in the next couple of months. My wife and I have already had a some frustrations in a few years of landlording, but we’re confident that it is worth the minor annoyances. We’ve been living overseas (Egypt and Italy) for the last 3.5 years, so that has made everything a little more difficult in terms of managing the rental.

    • says

      I have. I’d rather own stocks and physical property. It’s like owning a hybrid with no leverage. I’d rather just got a sports car or an SUV not a Lexus RX350, although the Cayenne is nice.

  2. Insourcelife says

    I start thinking about selling my rental condo every time I get an email from my tenant about something going wrong with the place. Latest one was the alleged mold issue. I addressed it with Concrobium and posted a DIY on my site, but things like this are becoming more of an annoyance now that we have a kid. But then I calculate my hourly rate for dealing with condo issues including tax benefits you mentioned and that always makes me feel better. It’s also part of our rainy day/downsizing plan so I won’t be selling it any time soon.

  3. says

    Interesting article! For me I will only consider selling a rental property if the cost of keeping it exceeds the income I am getting from it. It’s also going to be a good source of passive income after retirement especially if I cannot find a good investment to put the money from its sale.

  4. nbsdmp says

    From an IRR stand point, my real estate investment from 11 years ago has been by far the best investment I’ve made in my lifetime. I will absolutely sell it though one day as it is a means to an end. It is funny because I had this conversation yesterday with one of my business partners regarding a new investment we are looking at. This time it is a large multi-unit apartment building that we are being offered the “opportunity” to go in side by side with a gentlemen that has made literally a fortune doing this…the guy is 83 years old. It think it is simply just in his blood, he lives for this stuff and is happy to teach the next generation. Now has more money than he’d ever spend, donates millions annually and is all around a great person…I asked the question why he is still doing it and it is just because he loves it. I’d say the time to sell, barring some market anomaly or major life event you need the cash for (or quit your job for that matter) is when the burden shifts over the 50% line of being more of a burden than it is worth to you to keep doing it. The wealthiest people I have encountered are the ones who got rich slowly and then suddenly woke up at 55 and had a $25M net worth…then kept doing it because it was fun to them.

      • nbsdmp says

        My line is pretty high…It would take a hell of a lot for me to let it go. Having a signed leases going out 10 years makes it hard to even consider it. There is no investment that I know of that I could come close to making a similar return net of taxes. I hope I never end up selling.

    • says

      I would never consider being a landlord fun, so that fella is lucky. I spoke to a 74 year old fella who bought his 13-unit building 34 years ago for $690,000 and received an offer for $6.3 million this year he turned down. He said he’d just leave the property to the kids to deal with. Lucky kids! I bet they will probably just liquidate when he’s gone.

      • nbsdmp says

        I think guys like the one you and I know long, long ago passed the point of never needing money again…and they are o.k. with paying lots of fees to have other people handle the problems. So they make $3.2M a year passive income vs. $3.7M, hell they way they look at it is Obama pays for half of it anyway because of such high tax rates. (I can’t imagine living in California, I think Phil Mickelson was right on what most people think when he spoke out).

        I think you’ll probably do the same thing Sam and let your future kids worry about the spoils of your success.

  5. says

    I’m thinking about selling our rental properties too. Our living situation is changing a bit and we need more room. Selling the rentals and trade it in for a new house might be easier for us. I’m getting tired of dealing with tenants too.

  6. says

    Hey, would you look at the depreciation recapture! ;)

    Just as an additional note to your depreciation recapture, those extra gains caused by the recapture are treated as ordinary income, not capital gains. A very crucial part of tax planning for when you sell your property.

    All that being said, I agree with you as far as your selling when the depreciation runs out as being a potential time to sell. You’ve maxed out your depreciation benefit, so now the tax benefits have been a bit diminished. However, considering the substantial tax gain you would have, it might be worth selling in a year with planned low income. There are plenty of ways to accelerate or defer income, so timing a sale to coincide with a lower income year could generate significant tax savings as well.

    Personally, I would only sell if I NEED the capital for other reasons. A fully paid-off and depreciated property will be cash flowing tremendously, and will be taxed like any other income (outside of gains and dividends), so I’d just continue to reap the rewards of the purchase and use it to help fund my retirement/wealth preservation for the next generation.

    • says

      I knew I could count on you for highlighting depreciation recapture! The plan is to totally time a sale so that I’m a pauper one year. It’s more easy to be a pauper with a business than it is working for a company too.

      The default assumption really is to never sell. But, if there are times to sell, I think these three reasons are as good as any. I would bet these three reasons help EXTEND the average property owners ownership rate.


      • says

        Totally glad I could come through for you! Still working up a tax post for you btw – got my outline started.

        Totally agree on becoming a pauper for a year. Pretty easy to do with a business in fact. Income manipulation is pretty much standard for most small businesses. And for you, simply buy that Range Rover for business, and voila, some extra offsetting bonus depreciation expense! :)

  7. says

    I think there will definitely be a time that comes when you want to unload your rentals. For each person, this exact time will vary. If you get to the point where you feel too encumbered, it might make sense to step back. That, or hire a property manager and let them take care of EVERYTHING.

    If the property cash flows tremendously in a spectacular area (like San Francisco) I would be very, very reluctant to sell. If you have property in the absolute best of locations, it’s like sitting on a gold mine, literally. Not only do you get awesome cash flow, but insane appreciation as well.

    I would also think about selling if I wanted to access insane appreciation + downpayment. By doing a 1031 exchange you could sell and not have to pay a penny in taxes. But this would require you to still buy more property… A lot of people sell residential units and 1031 into a commercial building. As you get older, you probably don’t want to deal with tenants on a regular basis, so hiring out a PM might be the best option.

    When I get older, and am burned out, I’ll probably just start doing notes instead. No more hassle of being a landlord, but still collect monthly cash flow.

    • Jason says

      I’ve gotta disagree with you, FI Fighter.

      I used to think this way too, but after doing the research, it’s convinced me otherwise. The rents in San Francisco (and most of the Bay Area, really) are up there, but it’s more than offset by the overinflated prices. Because of the price-to-rent ratio, your money will go a LOT further in nearly any other area in the US, with the exception of maybe Manhattan.

      Here’s an example: I have a rental in the East Bay here that rents for about 1800. For the exact same purchase price, I can get almost a thousand dollars extra rent a month by moving that money to a comparable neighborhood out-of-state.

      Maybe the appreciation is better, sure, but equity doesn’t put food on the table.

      • says

        Hey Jason,

        I hear where you are coming from. Actually, I’m a Bay Area investor myself and own two properties locally. So, I’m all too familiar with the price-to-rent ratio that goes on around here. This is a reason why I’m also investing out of state. One of my out of state properties rents for the same amount as my Bay Area property, and I bought it for 1/2 the price!

        So, yes, definitely your money will take you further out of state, no question. However, it’s also important to consider downside risks. For myself, I don’t want a portfolio full of properties just in the Midwest. Sure, they cash flow great, but let’s be real, the job growth, rent stability cannot compare to what you find in the Bay Area. As a local investor, it’s a great feeling to know I can put an ad on Craigslist and get a qualified tenant that same night.

        Appreciation doesn’t put food on the table. So if you have a single Bay Area property that has shot up considerably, it may be wise to cash out. No disagreement there. However, if you were one of the lucky few who bought a property way back when and have not only insane appreciation but also insane cash flow, maybe you don’t want to sell? I recently met a girl who’s family owns a 7 unit apartment complex in SF. The basement alone rents for $5000/month. It’s owned free and clear. Why would you ever sell? Demand is through the roof…

        However, if you’re just starting out (like me), and don’t yet own too many properties in your portfolio, then yes, it probably makes more sense to sell so you can access the equity and generate much higher cash flow.

        So, it really depends on your situation. To accelerate cash flow, yes, it makes sense to sell and invest elsewhere. If you already have a well rounded portfolio, and the high priced properties still cash flow great, perhaps it wouldn’t be the best idea. In a way, you’re already set, so you might as well sacrifice some returns for the very best of location.

        I wish I had this problem!

        • Jason says

          Hi there FIFighter

          Yes, I can see your point – if your investment cashflow already covers everything you need and more, then it doesn’t really matter what you invest in. Just keep the units occupied and you’re good. But I’m really used to looking at things from a very “active investor” point-of-view, where the goal is to expand cashflow as fast as possible.

          Eventually I hope to get to this easier mode of investing and the numbers tell me it’s happening. But, personally, I can’t imagine this as a reality any more than I can imagine ANY of what’s talked about in this blog: retirement, having a lot of time to myself, not worrying about money, all of that seems like complete fantasyland.

          But, each day I still diligently do the actions, just in case the tall tales are true.

      • says

        I just can’t see myself owning in areas that I wouldn’t want to live. This has been one of my buying principles for a long time now b/c I think worst case scenario, what if I have to live in one of my rentals for several years. If great, then that’s a great worst case scenario.

    • B says

      Notes are a lot less hassle. I personally think real estate as an investment is worth the hassle (but maybe not forever); however, I’ve originated mezz notes and get really nice returns – you might like it, considering your background.

    • says

      I think you’re about 10 years younger than me right mate? If so, just give it 10 years and I think you’ll notice your enthusiasm of being a landlord change, especially if you find other means of making money e.g. online.

      I will probably try a prop manager first for a couple years before selling, just to make sure it’s worth it. In 17.5 years, I’m pretty sure the cash flow is going to double by then. Might be hard to get rid of them so we’ll see.

  8. Jason says

    Hi Sam

    I don’t think the right time to sell is when people get sick of dealing with tenants. To me, that sounds like an excuse, not a reason. There’s always property management companies that can take up the slack. You may have to go through a few to get the right one, but that’s all part of it.

    Also, as another poster said, I also like the idea of notes as a supplement. Just a couple of weeks ago, I started investing in them and am predicting double-digit returns and no tenant hassles.

  9. Marcel says

    Sam – I’m using your allocation models from one of your previous posts. I’m going for the Self-Belief framework and it’s saying I’d need to scale back a bit on real estate and invest more in my X factor, which I’m starting to do. Why not just stick with that?

    • says

      Fantastic you are bringing in the Recommended Net Worth Allocation post into the discussion.

      For you, that sounds great to scale back if RE is above the recommended allocation. For me, my X Factor, from a income basis is growing much faster than RE so I’m considering focusing where growth is greatest. As my X Factor grows over the years, RE naturally becomes a smaller portion of my NW, which means I should ironically be buying MORE RE to keep the ratios the same.

  10. Matt says

    CPA here, and also someone that owns a multi-family rental. In regards to your depreciation benefit above, you missed an important point. Since by it’s nature rental real estate is deemed to be a passive activity, once you exceed $150k AGI (married filing jointly) you lose all rental losses. Not exactly a big number for two professionals (or one for that matter).

    You still accumulate the NOL’s until you dispose of the property, or when your income is below that threshold. But you will not get any tax benefit on an annual basis

    • says

      The $150K income limit is a very important point indeed. Hope that income limit goes up over time. It has to due to inflation.

      Glad you also brought up rental losses, which serves to counteract depreciation recapture (Write2Reality, want to step in here?) at time of sale. Hence, the goal is to definitely make less than $150K at time of sale.

      Thanks for adding Matt.

      • Dan says

        Another thought as well, if it is a single family home rental, is living in it for 2 of the 5 years prior to the sale. And getting the 250k (single) or 500k (joint) capital gain deduction.

      • says

        Matt is absolutely correct on the rental losses being passive and ultimately deferred until you sell. These accrued losses effectively offset the ordinary gains caused by the recapture as the losses go from passive to active at the time of being sold. The 150k AGI limit only is in effect for the $25k rental income loss in each year of ownership, and doesn’t apply when you sell that property as it no longer is “passive” in the year sold. Those losses still accrue and are available to offset gains when you sell.

        Ultimately, you are deferring some of the tax benefit (e.g. any losses) until the time of sale, counteracting that allowable depreciation scenario.

        All that being said Sam, since you own a properties that cash flow like champs, odds are you aren’t creating passive losses and aren’t affected.

  11. says

    All good points! Like all investments, yo need to think about the best use of invested capital. Don’t misunderstand, I love rental property, but it is not the only form of investment as you well know. You age also has an influence on you decision too.

  12. says

    I didn’t realize there was that 27.5 year aspect of depreciation. Makes sense now. We often only think about the purchase and holding tax implications of having property and not as much about what the impacts are when it comes time to sell since that’s usually not on our radar. If you’re going to hold your properties long term hiring a property manager could take away a lot of the pains and hassles.

  13. brandon says

    Hey Sam,

    Can you share advice about buying rental property located in an area where you don’t live? I live in a high cost of living area, and it would be more affordable for me to buy rental property somewhere cheaper. I would probably see a better profit/% of income ratio.

    Is there too much overhead and additional stress if I buy a rental property further away from me?

  14. JayCeezy says

    Sam, I’m sure this thought has occurred to you, but I haven’t seen it in your posts or in any comments. As you appear to want to relocate away from SF sometime in the nearer future, to a state with no (or low) income tax like WA or HI, what if it played like this…
    1) sell your primary residence, to capture the $250K (or $500K, depending on domestic situation) in capital gains and pay zero taxes.
    2) move into this condo, where you have lived before and purchased well before the runup in SF property values, and stay for 2 of 5 years. Sell, and capture the $250K (or $500K) cap gains paying zero taxes (after resolving captured depreciation tax advantages, where eventual sale profits would be taxed at regular income).

    The downside is opportunity cost for future property value increases, value of imputed rent on primary, and cashflow provided by rental. Upside is, you remove risk of property value decline, tenant drama, vulnerability to taxation changes, and lastly the illiquid nature of real estate. In addition, you will have the free cash to invest as opportunity arises.

    You may have reasons to stay in SF for the time being (not asking for details, and like all your readers, respect your privacy), but if now, or in the future, you want the flexibility to relocate would this be a possible gameplan?

    • says

      When the time comes, living for 2 out of last 5 years to save on taxes is definitely what I plan to do. There’s just an opportunity cost of NOT renting out the rental for 2 years that must be compared to the tax savings.

      The conclusion I have for myself, and every landlord is to basically not sell for as long as possible, or at least until the depreciation or age limits have been reached. It’s all about generating that nice cash flow at the end for financial freedom.

  15. Nick Abbott says

    I’d suggest that over time, it’s a good idea to check in with value and the current depreciation of the subject property. I’ve found that often, people own investment real estate and over time the amount of depreciation in comparison to the value and the rents is less than when they purchased the asset. There are times, for certain investors that a sale and then reinvestment into another property provides them signifncanlty more depreciation. The cash flow may be the same, but with new purchase the depreciation amount may be much larger.

  16. Nicol says

    I have also read that the month of the year when you are going to sell your property, can also affect your deal. Selling in the spring and moving in the summer is a perfect arrangement for families. Families like to move during the summer to prepare for the new school year. The weather is warm and accommodating for moving and relocating. The winter season isn’t a favorite for homebuyers to view homes due to the cold and the holiday season but holiday ornaments add charm and help homes sell during the winter season. But of course, thanks to the online websites we can sell our property every day. For example, I have posted my advertising with the photos and house description at localmart.com and then many people called me to know more about the house. By the way, I sold it in winter))That is considered not a “perfect time” for selling.

  17. Jonny says

    Lets say you have one rental property and you live in your own place. What happens if you move to the rental property and live there for a few years before selling it.
    I am soon buying a house in the bay area. My plan is to buy another house (retirement home) in a few years and rent it out. Wouldn’t that help with reducing some of the capital gains tax encountered when it is eventually sold?


Leave a Reply

Your email address will not be published. Required fields are marked *