Listener Questions: Selling property now vs at retirement
First of all, thank you to Mike for listening to our podcast, and for sending us your question. We really enjoyed preparing for this complex podcast and we dug deep to analyse the facts and figures associated with it.
First of all, thank you to Mike for listening to our podcast, and for sending us your question. We really enjoyed preparing for this complex podcast and we dug deep to analyse the facts and figures associated with it.
Mike’s question relates to owning property and when to sell that property, in order to boost superannuation funds.
So, let’s take a look at the current financial situation of Mike and his wife, Janine.
Age: 56
Desired retirement age: 61
Combined superannuation balance: $410,000
Current assets: 3 investment properties
Mike’s question is about selling these properties and putting the income gains into superannuation, and whether it’s best to sell now or once he and his wife have retired.
Here’s a summary of Mike and Janine’s properties.
Property 1
Current value: $600,000
Purchase price: $260,000
Rental income before expenses: $19,000
Property 2 (very similar to Property 1)
Current value: $600,000
Purchase price: $280,000
Rental income before expenses: $19,000
Property 3
Current value: $600,000
Purchase price: $400,000
Rental income before expenses: $21,000
There are so many things to consider when deciding to sell property now versus in retirement. For instance, what will the expenses of these properties be over the next 5 years? What else could I do with that money instead? How much will I have to pay in capital gains tax? How much is my property worth now?
To start, we’ve broken down the annual cost of maintaining a property.
Every 15 years: approx. $40,000 to repaint the house (inside and out)
Every 15 years: approx. $20,000 to replace ducted air conditioning
Every 20 years: approx. $50,000 to replace floor coverings / renovate bathrooms or kitchens
Every year: approx. $1,000 for general maintenance, for example electrical and plumbing work or upgrading hot water systems
Total: $7,500 per annum
Of course, these amounts will be different based on the property and the location, but they are a reasonable estimate in most cases.
Here are some other costs that property owners might have. In Mike and Janine’s case, it would look like this:
Property 1
Rates and water: $2,500
Home and landlords’ insurance: $2,500
Real estate fee: $1,900 (10% of rent)
These are in addition to the annual maintenance cost of $7,500.
Total expenses for Property 1: $14,400 (before anything is paid off the remaining loan).
So, $19,000 comes in from rent, and $14,400 goes out, leaving them with about $4,600 per year.
Property 2 works out to be roughly the same.
Property 3 is a little different as the rental income is $21,000. The total expenses would be similar, but the real estate fee is higher. So, the total expenses are $14,600, leaving Mike and Janine with $6,400 in their pocket.
The 3 properties are worth $1.8 million and leave Mike and Janine with the amount of $15,600 per annum (pre-loan payment).
Our first conclusion is that this amount is nowhere near enough to survive on each year of retirement, so keeping the properties as the only source of income isn’t realistic – even if all the loans are completely paid off. This is an example of being asset rich, cash poor. Clients often tell us they can live off the $400 a week they are paid in rent, but when you consider the expenses of maintaining the property, they’re only keeping about a quarter of that amount.
So we come back to the question: do I sell now, or do I wait until I retire?
If you sell your property in the first new financial year after retirement you can minimise your capital gains tax a little. One common misconception is that selling when retired will reduce capital gains tax to zero. It doesn’t. With the right strategy, it can be significantly reduced, though.
What is the cost of selling these properties?
To sell Mike and Janine’s properties, it will cost around $47,700 in real estate fees, which is about 5% in commission on the first $18,000 of each property and then 2.5% on the balance. Then it will cost approximately $12,300 in legal costs, transfers and incidentals for the 3 properties. In total, it’s about $60,000 to sell the properties.
This would leave Mike and Janine with $800,000 of net proceeds / capital gain after taking out the $940,000 they still owe on their loans.
Another thing to note is that capital gains tax is discounted if the property is owned for more than 12 months. Therefore they would have $400,000 capital gain, or $200,000 each, added to their income tax. This capital gain is taxed just like any other income – which is why some people decide to sell their property once they are retired. If they have no income from a job, then that will lower the amount they are taxed on when selling the property. Assuming that Mike and Janine earn around $90,000 a year each while working, this is how much they would be lowering the taxable amount by if they waited to sell in retirement.
Another strategy people use is to sell the properties separately in a staggered process – if they spread the sales across a number of years, the incoming gains would be spread out and the tax would therefore be reduced.
Using the $90,000 income example, an employer contributes approximately $8,550 into their employee’s super. The cap for adding extra to your super is $25,000 per person per year. Let’s assume that Mike and Janine didn’t make any extra contributions over the last few years. This allowed amount would carry over to the following year. If the option to do this is available, then when the time comes to sell your property, you could add a larger amount to your super in one go. The contribution is taxed at 15% which is much less than the normal income tax rate. Using the ‘concessional contributions carry forward’ strategy for putting money into super, we could reduce the tax that Mike and Janine would have to pay in CGT from $170,000 to $123,000, leaving the amount of $676,300 to go into their super fund.
Additionally, since their properties have sold, they’ve also freed up $17,000 a year (from property expenses) that can now go into their super. While nobody can guarantee or calculate the exact return from investing in shares, that $676,000 plus the $17,000 per year would roughly compound to just over a million dollars in 4 years.
When deciding whether to sell now or sell after retirement – clients must remember that tax can’t be avoided altogether by waiting for retirement. Selling now does provide a little more assurance. Leaving it until you retire leaves the risk of the property being worth less, and it may also leave you in debt if you are still paying off loans. On the other hand, you’d be better off waiting to sell if property prices grow by more than 5% a year, but that wouldn’t line up with historical averages. And no-one can predict such growth.
The above figures are based on the properties being sold now. To be in the same position financially if you were to sell those same properties once you’ve retired, you’d need the houses to be worth around $400,000 extra in 5 years’ time.
As you can see there are many factors to consider. Current income is another one: if your current income is high, it might be better to keep the properties until you do retire. Concessional contributions also play a big part in the final outcome.
We know this information is very specific, and financial decisions can be highly complex. As always, we welcome your emails and phone calls if you would like to know more, or if you’d like to make an appointment with us for a consultation tailored specifically to your circumstances.
07 4772 0938 / mail@mo50.com.au
And thank you again to Mike for sending us this complex, but interesting question!
Mike’s question relates to owning property and when to sell that property, in order to boost superannuation funds.
So, let’s take a look at the current financial situation of Mike and his wife, Janine.
Age: 56
Desired retirement age: 61
Combined superannuation balance: $410,000
Current assets: 3 investment properties
Mike’s question is about selling these properties and putting the income gains into superannuation, and whether it’s best to sell now or once he and his wife have retired.
Here’s a summary of Mike and Janine’s properties.
Property 1
Current value: $600,000
Purchase price: $260,000
Rental income before expenses: $19,000
Property 2 (very similar to Property 1)
Current value: $600,000
Purchase price: $280,000
Rental income before expenses: $19,000
Property 3
Current value: $600,000
Purchase price: $400,000
Rental income before expenses: $21,000
There are so many things to consider when deciding to sell property now versus in retirement. For instance, what will the expenses of these properties be over the next 5 years? What else could I do with that money instead? How much will I have to pay in capital gains tax? How much is my property worth now?
To start, we’ve broken down the annual cost of maintaining a property.
Every 15 years: approx. $40,000 to repaint the house (inside and out)
Every 15 years: approx. $20,000 to replace ducted air conditioning
Every 20 years: approx. $50,000 to replace floor coverings / renovate bathrooms or kitchens
Every year: approx. $1,000 for general maintenance, for example electrical and plumbing work or upgrading hot water systems
Total: $7,500 per annum
Of course, these amounts will be different based on the property and the location, but they are a reasonable estimate in most cases.
Here are some other costs that property owners might have. In Mike and Janine’s case, it would look like this:
Property 1
Rates and water: $2,500
Home and landlords’ insurance: $2,500
Real estate fee: $1,900 (10% of rent)
These are in addition to the annual maintenance cost of $7,500.
Total expenses for Property 1: $14,400 (before anything is paid off the remaining loan).
So, $19,000 comes in from rent, and $14,400 goes out, leaving them with about $4,600 per year.
Property 2 works out to be roughly the same.
Property 3 is a little different as the rental income is $21,000. The total expenses would be similar, but the real estate fee is higher. So, the total expenses are $14,600, leaving Mike and Janine with $6,400 in their pocket.
The 3 properties are worth $1.8 million and leave Mike and Janine with the amount of $15,600 per annum (pre-loan payment).
Our first conclusion is that this amount is nowhere near enough to survive on each year of retirement, so keeping the properties as the only source of income isn’t realistic – even if all the loans are completely paid off. This is an example of being asset rich, cash poor. Clients often tell us they can live off the $400 a week they are paid in rent, but when you consider the expenses of maintaining the property, they’re only keeping about a quarter of that amount.
So we come back to the question: do I sell now, or do I wait until I retire?
If you sell your property in the first new financial year after retirement you can minimise your capital gains tax a little. One common misconception is that selling when retired will reduce capital gains tax to zero. It doesn’t. With the right strategy, it can be significantly reduced, though.
What is the cost of selling these properties?
To sell Mike and Janine’s properties, it will cost around $47,700 in real estate fees, which is about 5% in commission on the first $18,000 of each property and then 2.5% on the balance. Then it will cost approximately $12,300 in legal costs, transfers and incidentals for the 3 properties. In total, it’s about $60,000 to sell the properties.
This would leave Mike and Janine with $800,000 of net proceeds / capital gain after taking out the $940,000 they still owe on their loans.
Another thing to note is that capital gains tax is discounted if the property is owned for more than 12 months. Therefore they would have $400,000 capital gain, or $200,000 each, added to their income tax. This capital gain is taxed just like any other income – which is why some people decide to sell their property once they are retired. If they have no income from a job, then that will lower the amount they are taxed on when selling the property. Assuming that Mike and Janine earn around $90,000 a year each while working, this is how much they would be lowering the taxable amount by if they waited to sell in retirement.
Another strategy people use is to sell the properties separately in a staggered process – if they spread the sales across a number of years, the incoming gains would be spread out and the tax would therefore be reduced.
Using the $90,000 income example, an employer contributes approximately $8,550 into their employee’s super. The cap for adding extra to your super is $25,000 per person per year. Let’s assume that Mike and Janine didn’t make any extra contributions over the last few years. This allowed amount would carry over to the following year. If the option to do this is available, then when the time comes to sell your property, you could add a larger amount to your super in one go. The contribution is taxed at 15% which is much less than the normal income tax rate. Using the ‘concessional contributions carry forward’ strategy for putting money into super, we could reduce the tax that Mike and Janine would have to pay in CGT from $170,000 to $123,000, leaving the amount of $676,300 to go into their super fund.
Additionally, since their properties have sold, they’ve also freed up $17,000 a year (from property expenses) that can now go into their super. While nobody can guarantee or calculate the exact return from investing in shares, that $676,000 plus the $17,000 per year would roughly compound to just over a million dollars in 4 years.
When deciding whether to sell now or sell after retirement – clients must remember that tax can’t be avoided altogether by waiting for retirement. Selling now does provide a little more assurance. Leaving it until you retire leaves the risk of the property being worth less, and it may also leave you in debt if you are still paying off loans. On the other hand, you’d be better off waiting to sell if property prices grow by more than 5% a year, but that wouldn’t line up with historical averages. And no-one can predict such growth.
The above figures are based on the properties being sold now. To be in the same position financially if you were to sell those same properties once you’ve retired, you’d need the houses to be worth around $400,000 extra in 5 years’ time.
As you can see there are many factors to consider. Current income is another one: if your current income is high, it might be better to keep the properties until you do retire. Concessional contributions also play a big part in the final outcome.
We know this information is very specific, and financial decisions can be highly complex. As always, we welcome your emails and phone calls if you would like to know more, or if you’d like to make an appointment with us for a consultation tailored specifically to your circumstances.
07 4772 0938 / mail@mo50.com.au
And thank you again to Mike for sending us this complex, but interesting question!