If you’re contemplating selling an investment property, especially with property values on the rise, it’s important to take a strategic approach. As you look ahead to retirement, the decision to sell can have significant financial implications. Before taking action, we recommend working closely with your financial team to fully understand the impact of such a sale. Here are three strategies to help guide your decision-making process.

1. Assess the Tax Implications

Before selling any investment property, it’s crucial to understand the tax consequences. Meet with your financial advisor, tax professional, and real estate attorney to gain a clear picture of what the sale will mean for your finances.

One of the key discussions should revolve around the net proceeds you’ll receive after taxes. You may be considering a 1031 exchange, which can provide tax advantages by allowing you to defer capital gains taxes when you reinvest in another property. However, there are strict IRS guidelines to follow, and it won’t provide immediate profit, so it’s essential to ensure this is the right strategy for you.

For those already retired or nearing retirement, selling a property could have an impact on your Medicare premiums. If the sale pushes your Modified Adjusted Gross Income (MAGI) into a higher bracket, it could result in increased premiums for Medicare Part B.

2. Evaluate If Property Ownership Still Fits Your Lifestyle

Owning an investment property requires time, effort, and often, financial oversight. Beyond simply collecting rent, you’ll need to consider ongoing maintenance, potential vacancies, and dealing with tenants. While a property management company can handle these tasks, you’ll still have to oversee the relationship.

Take a step back and ask yourself if managing the property aligns with your current lifestyle and retirement goals. Will the property continue to hold its value if you wait to sell? Or, would selling now help you free up cash flow for other investments or retirement needs? These are all important considerations when determining whether keeping the property still serves your long-term plans.

3. Explore Alternative Investment Options

Selling an investment property doesn’t mean you need to liquidate your assets completely. There are other investment options worth considering that could offer tax advantages and potentially provide you with better returns.

• Opportunity Zone Funds: Created under the Tax Cuts & Jobs Act of 2017, Opportunity Zone Funds (QOFs) offer a way to potentially defer and reduce capital gains taxes. By investing in QOFs focused on economically-distressed areas, you may benefit from significant tax breaks. However, the rules surrounding these funds can change, so it’s essential to stay informed and consult your financial advisor about the most up-to-date regulations.
• Charitable Remainder Trust: Another option is to transfer the property into a Charitable Remainder Trust (CRT) before selling. The sale proceeds will not be subject to capital gains tax, and you can reinvest the funds. This strategy can also provide you with a steady income stream from the trust for the rest of your life. When you pass, the remaining trust balance is donated to a charity of your choice.

4. Weigh All Your Options

Once you’ve had discussions with your wealth management team and fully explored your options, you’ll be in a stronger position to determine whether selling your investment property is the right move. Whether you choose to sell or explore alternative investments, taking the time to evaluate all factors carefully will help you make the most informed decision for your financial future.