If you’re a property owner in Arizona with both a rental property and a primary residence, you may have considered selling one to improve your financial situation. A common question among homeowners is whether selling a rental property to pay off your primary residence is the right move.

This decision depends on your current financial goals, long-term plans, and the real estate market. Let’s dive into the pros and cons to help you determine if this strategy makes sense for you.

Why Consider Selling a Rental Property?

1. Debt Reduction and Financial Freedom

The primary reason for selling a rental property to pay off a primary residence is to reduce debt. If your primary residence has a mortgage, paying it off could provide substantial financial relief.

Eliminating your primary mortgage debt could give you more flexibility with your monthly cash flow, improve your credit score, and even reduce stress by lowering your financial obligations.

Selling your rental property could give you the liquidity needed to eliminate the mortgage on your primary residence faster.

2. A Strong Real Estate Market

Arizona’s real estate market has been known for its growth, with areas like Phoenix, Scottsdale, and Tucson seeing a rise in property values. If your rental property has appreciated in value over time, selling it could result in a significant profit. This is particularly true if you’ve owned the property for several years and have built equity.

Taking advantage of a strong market could allow you to sell the rental for a good price, and the proceeds from the sale may be enough to pay off your primary residence entirely or reduce your mortgage balance significantly.

3. Simplified Finances

Managing a rental property can be a time-consuming and expensive endeavor. From dealing with tenants to handling maintenance and property management issues, it’s a lot to juggle.

If you’re not interested in the responsibilities of being a landlord, selling the rental property can simplify your life. Without the burden of managing an investment property, you can focus on your primary residence and enjoy more time and energy for other pursuits.

Potential Drawbacks of Selling a Rental Property

1. Loss of Rental Income

One major downside to selling your rental property is the loss of steady rental income. If you rely on rental payments as part of your monthly budget, this can significantly impact your finances.

Depending on how much you owe on your primary mortgage and how much rental income you’re receiving, selling your rental property might not make financial sense if you are relying on that income stream to cover your living expenses.

2. Capital Gains Tax

When you sell an investment property, the IRS may require you to pay capital gains tax on the profit you make. In Arizona, this could eat into the proceeds you plan to use to pay off your primary residence.

However, there are ways to minimize capital gains taxes, such as through a 1031 exchange, which allows you to defer taxes by reinvesting the sale proceeds into another property.

3. Market Conditions

While Arizona’s real estate market has been strong in recent years, it can be volatile. If property values in your area drop, you might not get the return you’re expecting from the sale of your rental.

If the market conditions are unfavorable, it could take longer to sell your property or you might need to lower your asking price, affecting the amount of money you can apply to your primary mortgage.

Is Selling a Rental Property Right for You?

Ultimately, the decision to sell a rental property to pay off your primary residence depends on your personal financial situation.

If you are looking for a way to reduce debt and simplify your life, selling might be a good option. However, be sure to weigh the benefits of financial freedom against the loss of rental income and any potential tax implications.

Consulting with a real estate professional or financial advisor can help you make the best decision based on your specific circumstances.