Property investors often ask whether it’s a sound financial move to sell their investment property before or after retirement.
There are a number of factors which can make the decision more complicated, such as lifestyle issues and financial realities.
Thinking ahead and speaking with a Financial Adviser can help you make the most of any opportunities and avoid unexpected financial implications, such as tax obligations and loss of age pension entitlements.
Here are some important things to be aware of when investing in property for retirement.
Capital Gains Tax (CGT)
It is important to be aware that you will pay CGT if you sell an investment property.
If you’ve owned the property for at least twelve months, a 50 per cent CGT discount will apply to the profit. However, if you’ve owned the property for less than twelve months, CGT will apply to 100 per cent of the profit.
Make sure you read up on all the CGT exemptions and seek advice from an Accountant or your Financial Adviser on how selling the property will affect your individual circumstances.
Pension income and assets tests (Centrelink)
Pensions have income and asset limits. If you’re over these limits, you get a lower pension.
If you are selling an investment property, it’s important to note that the money released from the sale will be assessed under the income and age pension assets tests. Centrelink will look at the type (in this instance an investment property) and value of assets you own in and outside of Australia.
The value of your assets is what you’d get if you sold them at market value. Centrelink will deduct any debt secured against the asset from its market value.
Peter owns an investment property with a market value of $300,000 and a mortgage on it of $100,000. Centrelink would assess the value of their property as $200,000.
If you would like to acquire further information about the income or age pension assets tests, visit Department of Human Services.
Selling an investment property and adding the proceeds to your super balance isn’t as straightforward as it would seem. It is important to be aware that the rules about adding additional super contributions tighten after the age of sixty five.
If you are under sixty five years of age, the maximum after-tax contribution to super is capped in any one financial year at $100,000.
However, the ‘bring-forward rule’ allows you to contribute up to three years’ worth of after-tax (non-concessional contributions) in one year. This means you can contribute $300,000 in one year as long as your total super balance isn’t above $1.5 million and you complete the
three-year bring-forward period before you turn sixty five.
After the age of sixty five, it becomes somewhat more difficult to inject large sums into your super.
The annual after-tax cap of $100,000 remains in place, but the ‘bring-forward rule’ is no longer available. Instead, you must satisfy a work test to make any additional super contribution.
To pass the work test, you must work at least forty hours over a single thirty-day period within the financial year that you’re making contributions to your super.
Understanding the interplay between property, super and the age pension are vital to ensuring you get the best result from your investment, which makes speaking to a Financial Advisor particularly important.