When it comes to planning your retirement, timing is everything—especially when deciding whether to sell an investment property before or after you retire.
Both options have unique benefits and challenges that can significantly impact your retirement goals.
In this article, we’ll explore the key factors to consider when deciding if you should sell your investment property before or after retirement.
If you’d prefer to watch than read, this video also covers the topic:
Should You Sell Investment Property Before Or After Retirement?
Deciding whether to sell an investment property before or after retirement is a significant financial decision.
Let’s take a closer look at both options, breaking down the benefits and key considerations of each—starting with selling before retirement.
Selling Investment Property Before Retirement
If you’re thinking about selling your investment property before retirement, here are some key benefits to consider: :
- Simplification of Finances: Selling your property can streamline your financial situation.
- Enhanced Diversification: Liquidating your property allows you to diversify your investments more broadly.
- Tax Efficiency: Converting your property into cash enables deductible contributions to superannuation that may offset capital gains tax (CGT).
- Liquidity: Selling your property provides liquidity, allowing for partial draws on capital alongside income to cover living expenses—flexibility not available when funds are tied up in real estate.
While there are many benefits, there are some things to be mindful of when selling an investment property before retirement. These include:
- Tax Implications: Any capital gains realised from the sale will be taxed at your marginal rate, which could be higher due to employment income.
- Loss of Rental Income: Selling your property means losing potential rental earnings and any future appreciation in value, requiring careful reinvestment of the proceeds to achieve desirable returns.
- Access to Funds: If retirement is still years away, you may not be able to access the funds contributed to your superannuation until you reach retirement age.
Selling your investment property before retirement has its merits; however, in some cases, it may be more beneficial to sell after retiring
Selling Investment Property After Retirement
Waiting until after retirement to sell your investment property offers many of the same benefits as selling before retirement, including simplification of finances, enhanced diversification, tax efficiency, and increased liquidity.
An additional advantage of selling after retirement is the potential for lower capital gains tax.
This is because, in retirement, you likely won’t have work-related income that could otherwise push you into a higher tax bracket, increasing your capital gains tax.
Capital gains tax (CGT) is calculated by taking the difference between the sale price and the purchase price of the property, and if owned for more than 12 months, this gain is reduced by 50%. The resulting amount is then added to your taxable income for that year and taxed according to your marginal tax rates.
For this reason, selling an investment property after retiring, when you have little or no taxable income, can sometimes be the more favourable option.
However, this approach is not without its considerations. These include:
- Inability to Utilise Unused Contributions: As you near retirement, your super balance presumably grows. If it grows to above $500,000 in the financial year preceding the sale of your property, you will be unable to utilise unused concessional contribution caps from previous years.
- If 67 or Over: Selling an investment property after retirement when age 67 or over, you will need to satisfy the superannuation work test (or work test exemption) to claim a tax deduction for personal contributions made to super.
- Loss of Rental Income: Selling your property means losing potential rental earnings and any future appreciation in value, requiring careful reinvestment of the proceeds to achieve desirable returns.
As you can see there are a number of things to think about before you sell your property.
After weighing the pros and cons of selling your investment property before or after retirement, the next crucial step is deciding what to do with the sale proceeds.
How you manage these funds will play a pivotal role in shaping your retirement. Let’s explore the options available to make the most of your property sale.
What To Do With Investment Property Sale Proceeds?
Selling an investment property provides an opportunity to strengthen your financial position by providing liquidity, diversification and overall simplicity, but choosing how to use the proceeds is key.
You might consider contributing to superannuation to benefit from the tax concessions and retirement growth or you might invest outside super to maintain flexibility and accessibility.
Let’s have a look at the pros and cons of investing property proceeds inside or outside super.
Investing Property Proceeds Outside Super
Once you receive the proceeds on the settlement of an investment property, you might choose to invest the balance into shares, managed funds or term deposits in your personal name.
The benefit of this is that you are not restricted with how and where it is invested and you also retain access to the full amount at any time.
The downside, however, is that it might not be as tax-effective as contributing the proceeds to super would be.Investing Property Proceeds Inside Super
If you sell an investment property, you have the option to contribute the proceeds to your superannuation, provided you meet the eligibility criteria for such contributions.
The benefit of contributing investment proceeds to super is that you may be able to offset any capital gains tax resulting from the sale of the property, through tax-deductible super contributions; plus all future investment earnings on the amount contributed to super will be taxed at a maximum of 15%, reducing to 0% in retirement (compared to up to 47% in your personal name).
Eligibility for making contributions depends on several factors:
- Age:
- Under 67: You can make super contributions without restrictions based on age.
- Between 67 and 74: You must meet the work test requirements to make concessional (deductible) contributions.
- 75 and over: Personal contributions to super are not permitted.
- Superannuation Balance:
- Below $1.9 million: You can make both concessional and non-concessional contributions.
- Above $1.9 million: Only concessional contributions are allowed.
- Contribution Caps:
- Non-concessional cap: $120,000 per financial year, with the possibility of increasing this limit through the bring-forward rule.
- Concessional cap: $30,000 per year, potentially expandable by utilising unused contribution amounts from prior years.
It is also important to consider the type of contribution that is most beneficial:
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- Personal Non-Concessional Contributions: These are after-tax contributions made into super that you do not claim a personal tax deduction for. The benefit of these is that you are increasing the investments you own within the tax-effective superannuation environment.
- Personal Concessional Contributions: These contributions are deductible, potentially reducing your CGT. The advantage is that you can increase your tax-effective superannuation investments while obtaining a tax deduction. However, contributions tax will be payable.
The decision to contribute proceeds from the sale of an investment property to your superannuation is complex and varies based on individual circumstances.
So with all these considerations what should you do?
Should You Sell Your Investment Property Before Or After Retirement?
Deciding when to sell your investment property is a personal choice only you can make.
In general selling an investment property can:
- Significantly simplify your financial affairs;
- Remove the costs and stresses of property management;
- Free-up capital for immediate use;
- Enable further investment in the tax-effective superannuation environment;
- Allow you to reinvest the proceeds across a diverse range of investments to enhance diversification.
When it comes to timing, the main advantage of selling after retirement as opposed to before, is the potential for lower capital gains tax. The benefit of selling before retirement is that you have more years ahead to get the proceeds into super.
Ultimately, the choice of when to sell your investment property hinges on your retirement goals. What is your vision for retirement? This is where expert guidance can make all the difference.
At Toro Wealth, we specialise solely in retirement planning advice. Our aim is to give you confidence about when you can retire, the retirement income you can achieve and how to optimise your 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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