For those with an investment property and approaching retirement, the question often asked is whether to sell before or after.
According to Wealth Market Financial Adviser Brett Waldock, capital gains tax (CGT) is payable in the financial year you dispose of the asset and is based on the date of contract, not the settlement date.
“Generally speaking, heading into retirement you have a lower income, so if a gain is made then the impact on tax return could be less,” he said.
“Prior to retirement your income is likely to be higher, and adding a capital gain may result in a higher taxable income.
“However, you should work with a financial adviser to identify potential strategies to minimise the tax payable.”
The Australian Taxation Office defines a capital gain or capital loss on an asset as the difference between what it cost you to acquire it and what you receive once you dispose of it.
“You pay tax on the gains and it forms part of your income tax,” Mr Waldock said.
“If the asset is held for over 12 months, the capital gain is discounted by 50 per cent for individual owners and 33.3 per cent for superannuation funds.
“Unfortunately, capital losses cannot be offset against your income, but they can be used to offset future capital gains.”
Every client’s circumstances are different, and Mr Waldock said Centrelink pensions were assessed on both an assets and income test, meaning the investment property should have already been factored into these tests for retirement.
“The sale of the property will result in the net sale proceeds being assessed by Centrelink under the asset test and deeming rates will apply under the income test,” he said, adding it would also result in the loss of rental income, which could result in the retiree qualifying for a higher pension benefit under income test rules.
“The pension is assessed on both the asset and income tests and you could potentially qualify under one area and then fail in the other, which would impact your pension.”
Ultimately, the financial needs of the property owner are the major factor in this decision.
“As you head into retirement you may not be able to afford the maintenance on the property, especially if the property is vacant and no income is being received,” Mr Waldock said.
“In addition, if you have equity in the property and this equity is needed to fund your retirement, this will influence your decision making.”
Mr Waldock outlined an example in Dave and Rhonda, who are currently both 65 and purchased an investment property in 2012 for $795,000.
They incurred costs of $40,000 for stamp duty and legal fees.
“After the purchase, they spent an additional $15,000 on property improvements. Over the eight years of ownership they claimed $12,000 per annum in assessable deductions for decline in value and capital works,” Mr Waldock said.
“The property has now been sold for $1,045,000, incurring costs of $17,000. The assessable capital gain is $137,000 after applying the 50 per cent discount applicable for eight years ownership.
“Meaning, David and Rhonda each have $68,500 CGT to be included in the 20/21 tax assessment.
“This example clearly shows the timing of the sale of investment properties is critical and professional help should always be attained.”
Mr Waldock said a financial adviser could undertake projections based on your personal situation and financial goals, and provide clarity when deciding on selling assets.
“A good relationship between your financial adviser and tax accountant will provide the achievable outcomes,” he said.
The above information is general in nature and you should always consult the professionals and plan accordingly.