Landlords & investors

Selling a rental property to your current tenant.

When rent no longer covers the mortgage, or a long-term tenant asks to buy, a direct sale can be the cleanest exit — no vacancy, no turnover cost, no staging. It is also the transaction where owners most often skip the paperwork because the parties know each other. This hub keeps the friendliness and adds the structure.

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Landlord and tenant shaking hands in the doorway of a rental home

Quick answer

Selling to your tenant works like any sale, with three additions. Establish market value independently — an appraisal or broker price opinion — so the price is defensible to a lender and to family later. Handle the lease explicitly: it survives the sale, so the purchase and sale agreement should state how the lease, security deposit and prepaid rent are terminated or credited at closing. Then plan the tax side: depreciation taken over the years is recaptured on sale, a 1031 exchange is unavailable if you simply cash out, and an installment sale can spread gain across years but not the recapture.

No vacancy

The main economic advantage of selling to a sitting tenant

Recapture

Depreciation taken is taxed on sale, separate from capital gain

Lease survives

A sale does not end the tenancy by itself

Questions this hub answers

selling rental property to current tenant
can i sell my rental to my tenant
installment sale capital gains tax
depreciation recapture when selling a rental
how to handle a lease when selling

Running the sale properly

01
Set the price with independent evidence
An appraisal or broker price opinion protects both sides. Below-market pricing between unrelated parties is allowed, but the lender still underwrites to value and the number should be documented.
02
Confirm the tenant can actually finance it
Ask for a lender pre-approval before taking the property off the market mentally. A verbal 'we want to buy it' has cost many owners an entire selling season.
03
Deal with the lease and the deposit in writing
State in the agreement how the lease ends at closing, how the security deposit and any prepaid rent are credited, and who handles utilities and prorated rent on the closing date.
04
Decide cash sale, seller financing or installment sale
Seller financing can bridge a tenant who is close but not bankable. An installment sale spreads capital gain over the years you receive payments — but depreciation recapture is generally due in the year of sale.
05
Close through escrow with full title work
Familiarity is not a substitute for title insurance, a payoff statement and a recorded deed. Escrow also handles the excise tax affidavit and the prorations neatly.

Ways to structure the sale

Structure	How it works	Trade-off
Straight cash sale	Tenant obtains a mortgage; you receive proceeds at closing	Simplest; full gain and recapture in one tax year
Seller financing	You hold a note secured by the property	Income stream and buyer flexibility; you carry default risk
Installment sale	Payments spread over years, gain reported as received	Spreads capital gain; recapture generally due up front
1031 exchange	Proceeds roll into another investment property	Defers gain; strict identification and closing deadlines

Rental property financial statements and keys on a desk

Checklist

Documents and decisions before closing

Appraisal or broker price opinion establishing market value
Written lender pre-approval from the tenant-buyer
Purchase and sale agreement addressing lease termination and deposit credit
Security deposit accounting and any prepaid rent reconciliation
Basis worksheet: purchase price, capital improvements, depreciation taken
CPA review of recapture, capital gain and any installment sale terms

Selling to a tenant — questions owners ask

Do I still need a broker if the buyer is already found?

You need the contract, disclosures, timelines and escrow handled correctly; a broker can be engaged at a reduced scope for exactly that. The risk in a friendly sale is procedural, not finding a buyer.

What happens to the lease at closing?

A lease runs with the property, so it does not end automatically. When the tenant becomes the owner the tenancy merges, but the agreement should still say so explicitly and settle the deposit and prorated rent.

Can I do a 1031 exchange when selling to my tenant?

Yes, if you are exchanging into another qualifying investment property and follow the identification and closing deadlines with a qualified intermediary set up before closing. You cannot decide after the funds hit your account.

Is an installment sale a way to avoid tax?

No — it spreads capital gain across the years you receive payments, which can reduce the rate applied in a single year. Depreciation recapture is generally taxed in the year of sale regardless. Confirm the specifics with your CPA.