If you own multiple units of property, such as apartments, condos, or townhouses, you may want to sell some of them to free up cash, reduce debt, or diversify your portfolio. However, deciding which units to sell can be tricky, as you need to consider the tax implications, the market conditions, and your personal preferences.
One way to approach this decision is to compare the appreciation or depreciation of your units, which is the change in their value over time. Appreciation or depreciation can be calculated by subtracting the purchase price from the current market value of the unit, and dividing by the purchase price. For example, if you bought a unit for $200,000 and it is now worth $250,000, the appreciation is ($250,000 – $200,000) / $200,000 = 0.25, or 25%.
Depending on your situation, you may want to sell your most appreciated units or your least appreciated units. Here are some pros and cons of each option:
Selling Your Most Appreciated Units
Pros:
- You can lock in your profits and avoid the risk of losing value in the future.
- You can reinvest your proceeds in other assets that have more growth potential or lower risk.
- You can reduce your exposure to a single market or property type, and diversify your portfolio.
Cons:
- You may have to pay higher capital gains tax on your profits, depending on your income and tax bracket.
- You may lose out on future appreciation if the market continues to rise or your unit has unique features that make it more desirable.
- You may have to deal with higher selling costs, such as commissions, fees, and repairs.
Selling Your Least Appreciated Units
Pros:
- You can get rid of your underperforming or problematic units, and free up cash for other purposes.
- You can lower your maintenance costs, property taxes, and insurance premiums.
- You can avoid further depreciation if the market declines or your unit faces competition or obsolescence.
Cons:
- You may have to sell at a loss or break even, which can hurt your net worth and cash flow.
- You may miss out on potential appreciation if the market rebounds or your unit benefits from external factors, such as infrastructure improvements or demographic changes.
- You may have to deal with lower selling prices, longer listing times, and more negotiations.
Example
To illustrate the difference between selling your most appreciated units or your least appreciated units, let’s look at an example. Suppose you own four units of property in different locations, and you want to sell two of them. Here are the details of your units:
| Unit | Purchase Price | Current Market Value | Appreciation |
|---|---|---|---|
| A | $200,000 | $300,000 | 50% |
| B | $150,000 | $180,000 | 20% |
| C | $100,000 | $90,000 | -10% |
| D | $50,000 | $40,000 | -20% |
If you sell your most appreciated units, A and B, you will receive $480,000 in proceeds, and pay $80,000 in capital gains tax (assuming a 20% tax rate), leaving you with $400,000 in net proceeds. You will also incur $24,000 in selling costs (assuming a 5% commission rate), leaving you with $376,000 in cash.
If you sell your least appreciated units, C and D, you will receive $130,000 in proceeds, and pay no capital gains tax, leaving you with $130,000 in net proceeds. You will also incur $6,500 in selling costs (assuming a 5% commission rate), leaving you with $123,500 in cash.
As you can see, selling your most appreciated units will give you more cash, but also more tax liability and selling costs. Selling your least appreciated units will give you less cash, but also less tax liability and selling costs. The best option for you will depend on your financial goals, risk tolerance, and market outlook.
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