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.
If you have held the property for less than 12 months, you will be taxed on 100% of the capital gain using your income tax rate. However, if you have held the property for more than 12 months, only 50% of your capital gain is susceptible to capital gains tax.
Your investment's cash flow is the cash transferred in and out of the property. If the property's outflows (the money spent on expenses like insurance, taxes and repairs) are greater than its inflows (the money you make from rent) it might be time to sell.
However, retirees are exempt from Capital Gains Tax if: the asset is owned/acquired through an SMSF, and; the asset is sold after retirement, when all members of the SMSF are in the pension phase.
Here are 6 indicators that now is a good time to sell your investment property: You're holding a rental in a stagnant or declining market. You've recently retired or started working part-time. The property is negatively geared but isn't growing in value.
If, after all the expenses, your property is paying you money each month, it's a relatively good indication it will continue to do so the longer you keep it. If it's negatively geared, i.e., you're losing money on it, you'll need to weigh up whether the potential returns make your investment worth holding on to.
As a general rule, you can avoid capital gains tax when selling your investment property if that property is your primary place of residence (PPOR). This rule exists because you usually don't generate an income from living in your own home.
If you are already on the age pension, your investment property will be counted in the asset test, less any loan so long as it's secured against the investment property.
For most people it's to enjoy their golden years without having to worry about money or penny pinching from week to week. Investing in property is a great way to set yourself up to thrive in retirement because it has the potential to not only increase your net worth but also provide you with a stable income.
Long-term investment
Over time, the value of your investment property may go up, along with your rental income, especially if the property is in a high-yield area. This means your cash flow can also improve, leading to positive cash flow, which you can then use to expand your investment portfolio.
The 1 per cent rule is used by real estate investors when assessing a potential property purchase. According to this rule, the monthly rental income generated from a property must be equal or greater than 1 per cent of the purchase price.
A Decade-Long Hold
First of all, there's no tax on any appreciation generated by a QOF investment. Furthermore, according to the IRS, investors holding their QOF investments for 10 years or longer could permanently exclude capital gains that result from the sale or exchange of that investment.
To avoid CGT, you'll need to live in a property for twelve months for it to be counted as your main residence before you can move out and use it as an investment property.
The median holding periods in NSW currently stand at 9.7 years for all purchasers, 10.5 years for owner occupiers and 8.8 years for investors. Further, average holding periods in NSW are 18.8 years for all purchasers, 22.6 years for owner-occupiers and 13.7 years for investors.
The asset value limit is the amount of assets a person can own before their pension or payment will reduce from the maximum rate under the assets test. Example: Currently the asset value limit for a single service pension homeowner is $301,750 and for a single service pension non-homeowner is $543,750.
Once you're retired, you still must declare all income. As a retiree, you may have income from both tax-free and taxable sources. For instance, an income stream from a taxed super fund will be tax-free, while income from a rental property is taxed at the marginal tax rate.
Usually, a property stops being your main residence when you stop living in it. However, for CGT purposes you can continue treating a property as your main residence: for up to 6 years if you used it to produce income, such as rent (sometimes called the '6-year rule')
“If you rent the property out for, say, five years, then move back in for six months, then rent out the property again for another five years, your entire capital gain will be tax-free,” he said. “The 'six-year rule' resets each time you move back into the property and live in it as your main residence.
Capital gains tax is the fee you pay on any profit made from the sale of an investment property. This profit is referred to as a capital gain and is the difference between what you paid for the property (your cost base) and what you sold it for.