Selling an investment property after retirement can be a great strategy for a number of reasons. But, should you sell your investment property when you retire? And, if so, how and when should it be done?
This article covers some of the things you should be considering when it comes to selling your investment property before or after retirement.
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Selling Investment Property After Retirement
Selling an investment property after retirement can be beneficial for a number of reasons, but there are also some things to be mindful of.
Importantly, the timing of when the property is sold and what you intend on doing with the sale proceeds will go a long way to determining whether or not selling your investment property is a good retirement planning strategy.
Detailed below are some of the pros and cons associated with selling your investment property when you retire.
Benefits to Selling your Investment Property When You Retire
The benefits of selling your investment property when you retire include the following:
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Reduced Risk
An investment property will usually make up a large portion of your wealth. Even if you own several properties, each property will probably represent a good chunk of your retirement savings. By selling your investment property when you retire, you are reducing the reliance on that large asset to provide the returns required to meet your retirement objectives. Your property may have had good returns thus far, but you should consider how your retirement would look if property prices fell 25%, rents reduced, large maintenance costs were incurred, or if you were unable to find a suitable tenant for an extended period of time. It’s bound to happen at some point.
Liquidity
For a lot of people, covering retirement expenses will consist of both a receipt of investment income (e.g. rent/dividends) and a drawdown on capital. With shares or managed funds, this can easily be achieved, because small parcels of shares or managed funds can be sold each year to fund the capital drawdown component. This is impossible to achieve with property, because you are unable, for instance, to sell the bathroom to free-up some capital and keep the remainder of the house. What if you wanted to spend $50,000 on a new car, caravan or holiday? You can’t just sell the living room.
Diversification
Selling an investment property when you retire allows you to re-invest the proceeds into a range of other investment options. Specifically, you can invest into a portfolio that gains exposure to an array of asset classes and sectors that could be more aligned with investment risk suitable for a retiree. That is, a portfolio that has more steady returns, lower fluctuations and more certainty of achieving your desired outcome.
Tax
Selling your investment property when you retire can result in less tax. Firstly, it could mean less capital gains tax, depending on your other sources of taxable income for the year and how much of the proceeds you are able to contribute to super and; secondly, potentially reduced future tax if you have the ability to contribute the proceeds to super, where all investment earnings can be received tax free, compared to your individual tax rate if owned in your personal name.
Less Stress & Costs
In some cases, managing an investment property can be stressful. By selling the property at retirement, you will have one less thing to worry about, as other types of investments such as shares and managed funds are more passive, yet with similar returns. Selling your investment property after retirement can mean no more managing tenants, real estate agents, advertising, maintenance, and so on – not to mention the costs incurred from each of these.
Related Article: Can I Invest My Super in Shares?
Disadvantages of Selling Your Investment Property When You Retire
While there are many benefits of selling your investment property after retirement, there are also some disadvantages, such as:
Capital Gain Tax
Selling an investment property is a capital gains tax event, which means any realised capital gain resulting from the property sale will be assessed for capital gains tax (CGT) purposes. While there are easy ways to reduce or even eliminate CGT resulting from the sale of a property at retirement, it is most certainly something that needs to be considered.
Future Returns
Once you sell an investment property, you will obviously no longer benefit from the future performance of that property. It’s possible that the assets you choose to invest the proceeds into do not perform as well as the property would have if you had held onto it.
Sale Costs
Real estate and legal costs are likely to be incurred when selling a property, which ultimately reduces the net proceeds received. This is another consideration that needs to be taken into account when deciding whether you should sell your investment property at retirement.
Should I Sell My Investment Property Before I Retire?
When deciding whether you should sell your investment property before you retire, you should be considering things such as the timing of the sale, what you intend on doing with the proceeds and how to minimise or eliminate CGT. Let me explain.
When it comes to the timing of a property sale, you might want to consider overall economic macro conditions, such as where we might be in the property cycle and whether or not now represents a reasonable time to sell.
You should also have a plan in place about what you will do with the sale proceeds. Will you be contributing some or all of the proceeds to super? How will the proceeds be invested? Should a dollar-cost averaging strategy be employed?
And, importantly, you should consider the tax implications of selling an investment property before you retire. For instance, if you are selling the property before you retire, this suggests that you are still working, which means you will have at least one other source of taxable income, which is likely to increase potential CGT. You may also have a reduced available concessional contribution cap due to employer contributions being received, which could further limit your ability to reduce the CGT resulting from the sale of the property.
Should I Sell My Investment Property When I Retire?
Selling an investment property when you retire can help you prepare better for retirement, as it can enable you to reduce the risk of your investment strategy, improve diversification, increase liquidity, reduce tax and simplify your overall financial situation.
Selling an investment property when you retire can be more beneficial than selling it before you retire, from a tax perspective. Especially if you sell the property in the financial year after you last earned work-related income. The reason is that the assessable capital gain will not be added to work-related earnings for tax purposes. Also, you could have a higher available concessional contribution cap to further reduce tax, particularly if you have carry-forward unused amounts.
To Sell …or Not to Sell Your Investment Property
This video gives you the decision-making framework to help you decide whether or not you should be selling your specific investment property.
Do Retirees Pay Capital Gains Tax When Selling an Investment Property?
In Australia, retirees do pay capital gains tax when selling an investment property. However, retirees are likely to pay less in capital gains tax than pre-retirees, due to assessable capital gains being added together with all other forms of taxable income before tax is calculated at marginal rates. Therefore, as a retiree does not have an employment wage, less capital gains tax is likely to be payable.
It is also possible for a retiree to not pay any capital gains tax when selling an investment property through deductible super contributions and the general 50% CGT discount, or if the investment property is owned within a SMSF that is in pension phase.
How To Avoid Capital Gains Tax When Selling an Investment Property in Australia
To avoid capital gains tax when selling an investment property in Australia, you should consider selling the property in a financial year that you have little or no other taxable income and the most amount of concessional contribution and unused carry-forward caps available.
Advice on Selling an Investment Property
Prior to selling an investment property in Australia you should seek personal financial advice. I’ve lost count of how many times people have contacted us for advice on how to reduce tax or where to invest sale proceeds after they have already sold an investment property – in many cases it’s too late!
Getting retirement advice prior to selling an investment property can optimise the timing of the sale, ensure any capital gains tax is minimised or eliminated and have a plan on how the proceeds should be invested or contributed to super.
If you are looking to sell an investment property as part of your overall retirement plan, I encourage you to obtain personal financial advice. Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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As an expert in retirement planning and investment properties, I have extensive knowledge of the factors influencing the decision to sell an investment property after retirement. My expertise is backed by a deep understanding of financial strategies and the intricate details involved in optimizing retirement plans. Here's a breakdown of the key concepts discussed in the article:
Benefits of Selling Investment Property After Retirement:
1. Reduced Risk:
- Explanation: Selling an investment property reduces reliance on a single asset for retirement income.
- Expert Insight: Emphasizes the importance of diversifying assets to mitigate risks associated with property market fluctuations.
2. Liquidity:
- Explanation: Property sale provides liquidity, allowing for easier management of retirement expenses.
- Expert Insight: Highlights the contrast between selling shares and property in terms of liquidity and capital drawdown.
3. Diversification:
- Explanation: Proceeds from the sale can be reinvested in diverse assets, aligning with a retiree's risk tolerance.
- Expert Insight: Stresses the advantages of a diversified portfolio for stable returns and reduced volatility.
4. Tax Benefits:
- Explanation: Selling before retirement may lead to reduced capital gains tax, especially if proceeds are contributed to super.
- Expert Insight: Addresses the tax implications and advantages of selling property within the context of retirement planning.
5. Less Stress & Costs:
- Explanation: Selling an investment property eliminates the stress and costs associated with property management.
- Expert Insight: Highlights the practical benefits of a more passive investment approach in retirement.
Disadvantages of Selling Investment Property After Retirement:
1. Capital Gains Tax:
- Explanation: Selling triggers capital gains tax, impacting the net proceeds from the sale.
- Expert Insight: Advises on considering strategies to minimize or eliminate capital gains tax.
2. Future Returns:
- Explanation: Selling means forgoing potential future returns from the property.
- Expert Insight: Raises awareness about the trade-off between immediate liquidity and future investment performance.
3. Sale Costs:
- Explanation: Selling incurs real estate and legal costs, reducing the overall proceeds.
- Expert Insight: Encourages thorough consideration of all costs involved in the decision-making process.
Timing and Considerations:
1. Timing of Sale:
- Explanation: Suggests considering economic conditions and the property cycle when deciding when to sell.
- Expert Insight: Stresses the importance of strategic timing for maximizing returns.
2. Use of Sale Proceeds:
- Explanation: Highlights the need for a clear plan on how to use the sale proceeds, such as contributing to super or other investments.
- Expert Insight: Emphasizes the importance of a well-thought-out financial strategy.
3. Tax Implications:
- Explanation: Discusses the tax implications of selling before or after retirement, considering other sources of taxable income.
- Expert Insight: Guides readers on assessing the potential impact of tax on the decision-making process.
Specifics Regarding Capital Gains Tax for Retirees:
1. Retirees and Capital Gains Tax:
- Explanation: Retirees in Australia may pay capital gains tax, but the tax burden is likely to be lower than for pre-retirees.
- Expert Insight: Explores the unique tax considerations for retirees in the context of property sales.
2. Strategies to Avoid Capital Gains Tax:
- Explanation: Advises on strategies to minimize or avoid capital gains tax, including deductible super contributions and CGT discounts.
- Expert Insight: Provides actionable advice for retirees to optimize their tax position.
Importance of Financial Advice:
1. Seeking Personal Financial Advice:
- Explanation: Stresses the importance of obtaining financial advice before selling an investment property.
- Expert Insight: Advocates for proactive financial planning to optimize timing, tax implications, and investment strategies.
Conclusion and Additional Resources:
1. Retirement Planning Services:
- Explanation: Encourages readers to explore retirement planning services for personalized advice.
- Expert Insight: Promotes the value of specialized financial planning, as exemplified by Toro Wealth.
In conclusion, the article comprehensively addresses the nuanced decision-making process of selling an investment property in retirement, providing valuable insights and expert advice for individuals navigating this crucial financial transition.
