Timing It Right: Selling Rental Property to Pay Off Your Primary Residence

If you’re considering selling your rental property to pay off the mortgage on your primary residence, timing and financial goals are two key factors. This decision isn’t just about freeing yourself from debt; it’s about making sure the move fits your long-term financial strategy — and that you won’t regret it later.

In this post, we’ll guide you through a series of real-world questions to help you assess whether the market and your circumstances are right for selling a rental property to pay off a primary residence.

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Editor’s note: This post is meant to be used for educational purposes, not financial advice. HomeLight encourages you to consult your own advisor.

Should I sell my rental property to pay off my primary residence?

To make a more informed choice, we’ve structured this post around a set of 10 questions designed to help you evaluate whether selling your rental property to pay off your primary residence is the right move.

These questions will cover various aspects of your financial situation, current market conditions, and your future goals, providing a preliminary decision-making map.

Each question is crafted to walk you forward to the next level of priority or potential impact. We start by asking whether the market is baked properly to maximize your investment proceeds. In most cases, this first question will either open the gate or cause you to hesitate.

1. What’s happening in the local rental market?

One of the first factors to consider is the state of the local rental market. Is your rental property in an area where demand is high, or has there been a downturn in rental prices? Understanding market trends can help you gauge whether selling now would be financially beneficial or if holding onto the property might offer better long-term gains.

2. Do I have a pressing financial need now?

Next, assess whether you have an immediate financial need that selling your rental property could address. Whether it’s paying off high-interest debt, covering medical expenses, or dealing with another urgent financial matter, selling your property might provide the funds you need. You’ll need to balance this decision against the potential long-term benefits of keeping the rental income. An immediate cash flow solution may outweigh market concerns. However, there are other ways to generate a lump sum of money from your rental property.

3. Would a cash-out refinance be a better solution?

Instead of selling, consider whether a cash-out refinance on your rental property might be a better solution. This option allows you to tap into the equity of your rental property while still holding onto it, potentially providing you with the funds needed to pay off your primary residence without losing your investment.

4. Is my rental property financed at a low rate?

Examine the current financing on your rental property. If it’s locked in at a low interest rate, selling might not be the best financial move, especially if you’re benefiting from positive cash flow and the low interest rates that were available during the pandemic era when many homeowners refinanced. Compare the cost of keeping the property versus the benefits of paying off your primary residence before making a decision.

5. Can I make a better investment elsewhere?

Think about whether selling your rental property would allow you to invest in something that offers a higher return. If the property isn’t performing as well as you’d like, or if there’s a more lucrative investment opportunity available, it might make sense to sell and reallocate your resources. There is an ongoing debate among investors about whether paying off your mortgage is truly the best option.

6. Am I prepared for the tax repercussions?

Selling a rental property can come with significant tax implications that you’ll need to be prepared for. Capital gains tax, depreciation recapture, and potential state taxes can all impact the net profit you’ll receive from the sale. It’s essential to consult with a tax professional to understand how these factors will affect your overall financial situation. Being aware of the tax burden ahead of time can help you decide if selling is worth the potential costs or if it’s better to explore other options.