Bruce Brammall, The West Australian, 26 November, 2018
If you’ve got a big investment property decision to make heading into retirement, I hope you’ve got a huge tax bill coming.
I’m not being nasty! It’s certainly way better than the alternative.
What you don’t want heading into retirement is to be sitting on a capital loss after having owned the property for 10 years. Or worse, the property is worth less than the outstanding loans – that’s potentially a pushing-back-retirement-for-five-years disaster.
So, I hope you have a tax liability awaiting. You’re sitting on reasonable gains, maybe even a property that’s positively geared.
If you’ve got a “good” problem, there are four things you should be considering: whether to sell it; when to sell it; how to minimise tax; and what to do with the released equity.
Firstly, I must state my preferred holding period for property matches Warren Buffett’s when he’s investing: “Our favourite holding period is forever.”
I wouldn’t sell property without a really good reason. There are two main reasons for this.
The first is that the cost of buying and selling property in Australia is ridiculous. Depending on which State the property is located, stamp duty will cost up to 5.5 per cent. The cost of real estate agents and marketing costs to sell the property is, give or take, 3 per cent. You’re looking at between 6-9 per cent to buy and sell a property.
The second is that if you never sell a property, you never have to pay capital gains tax. If it creates sufficient income for you, you can hold it until you die and leave CGT problems for your heirs. (And they only pay CGT if they sell it.)
So, first question, do you sell or not?
There are many potential factors at play here. The main one is likely to be whether the income produced by the property (or properties) is enough to live on, along with your other income. If you’ve done your sums and it is, do you really want to sell?
If it’s not, you might need to sell to release some of that equity to spend. This is pretty common.
Second question, when to sell it. Before or after retirement?
If you sell while you’re still earning a reasonable income, then you’re likely to pay more capital gains tax than if you sell after retirement.
This is because a capital gain (or 50 per cent of the gain, if you’ve owned it for longer than a year) gets added to your other income before you pay tax.
Therefore, if you sell in a year where you’ve earned $80,000 (or more), you’re going to pay a lot more CGT than just after you’ve retired and you’re earning nothing.
Third, how do you minimise tax?
The first part I’ve just answered – by considering selling it before or after retirement. However, you’ll probably need good advice regarding your own situation on this, particularly if you own the property jointly with your partner.
Another good way of reducing the tax bill? Making concessional contributions (CCs) to super.
If you’re under 65, or have met the “work test”, then you might be able to make a contribution of up to $25,000, which could shave up to $8000 off your tax bill. But remember CCs also include any contributions made by your employer via the Superannuation Guarantee.
And, finally, what do you do with the released funds?
This is where you’ll really need to seek the advice of a good financial adviser. Whether you put it into super, or invest it outside of super, will depend considerably on where your existing assets are and how much equity you’re releasing from the sale of your property assets.
If you’re able to make non-concessional contributions to super, and able to use the three-year pull-forward rules, you might be able to get up to $300,000 into super (or up to $600,000 for a couple) where, eventually, the money will generate tax-free income for you.
So, if this is a position facing you, I hope you’ve got a good tax problem. And if you do, for your sake, get some quality advice. It will be worth thousands, probably tens of thousands, to you.
Don’t donate extra to the tax office!