Mailbag Monday: Selling a Rental Property
We’re a retired couple, doing well on our pensions with a small amount of cash and investments to supplement them. I inherited a house with no mortgage in another state when my parents died and I’ve been renting it out for the past twenty-five years or so. I’ve decided it’s time to sell it now and I’m concerned about the best way to deal with the proceeds of the sale.
— Dave
Dave, do you mean the tax consequences of selling the home, or where to put the proceeds once you’ve sold it? For the former, I would speak to a good tax advisor, because while there are exclusions in place that eliminate taxes on the profits of a home sale — up to a certain amount — they generally will not apply when you have not lived in the home for at least two of the five years prior to the date of sale.
As for what to do with the money, keep in mind that you are eliminating a constant source of income — that rent. Will you need to replace that on a monthly basis to continue your standard of living? If so, one option is to put a portion of this money into an immediate annuity. This will give you a steady stream of income to replace that rent.
If you feel that you are covered as far as income for now and you’d like to invest it for a later date, you can do that in a taxable account. You’ll likely want to invest in tax-efficient investments like index funds or ETFs, and you should be careful about the amount of risk you take, taking into consideration when you think you will need this money.
Finally, I always think that a windfall is a great time to consult a financial advisor, and I generally advise sitting on the money for several months before doing anything, so you don’t make any rash decisions.
