News

Important things to factor into your decision before you sell

Here at Trove we are experiencing high numbers of investors wanting to take advantage of increasing dwelling prices and sell their investment property.  Before you take that leap, there are a number of factors you should first consider;

1.  Why am I selling? 

This is a critical question.  Many people simply want to take advantage of the gain in value their investment property has made - however selling is not the only way.  There are so many ways to use the equity you have gained on your investment property without selling, and without it costing $8000! (approx cost of sales agents fees and marketing).   

Your reason to sell may be a simple as wanting to free up some cash for a renovation on your home or take a holiday.  There are simple ways to do this using your equity that leave you in the property market, ensuring you continue to benefit from property value increases into the future (particularly now when interest rates are so low).

Another reason to sell may be that you simply want to free up your cash flow.  Are you tired of having to tip in money every week?  If this is the case it is critical to look at your loan structure.  Are you on an interest only loan that enables you to significantly reduce the repayments, however keep the asset?  Are you on the best interest rate?  Would there be benefits for you to have an 'offset' account?

Is your investment property starting to look tired and in need of renovations?  Once again it may be beneficial to use the equity you have made in the home and take out an improvement loan to do renovations such as carpets, kitchens, bathrooms, pergola’s.  Renovations will not only improve the value of the investment, but also improve your return and give you many tax depreciable and claimable expenses.  Talk to us here at Trove about how we can assist.

Whatever your reason, before you embark on these big decisions it is important to consider all your options, and focus on an end goal that continues to grow your wealth.  Talk to your accountant and have a financial review from a trusted finance expert to ensure selling is actually your best option moving forward.  Trove have relationships (non paying!!) with a number of awesome experts that specialise in residential investing, so contact us to be put in touch.  

2. Will I have to pay 'Capital Gains Tax'?

When you sell or dispose of a rental property if you make a capital gain, you are required to pay capital gains tax on the 'gain'.  This is obviously important to calculate as you don't want a hefty surprise at tax time.  You also need to factor this expense in when you are working out how much money you will actually end up with once the asset is gone. 

A capital gain is the difference between what it cost you to obtain and improve the property (the cost base) and the amount you receive when you dispose of it.  To calculate the 'cost base' you need to work out the following (please note I have inserted figures as an example only - you will need to calculate your own based upon your own circumstances); 

$350,000 Purchase Price of the residential investment property (e.g. May 2016)

+ $20,000 Cost to purchase (stamp duty and legal fees)

+ $  5,000 Cost of property improvements (e.g. a new fence)

-  $  8,000 Decline in value deductions (e.g. $2,000 per year)

-  $10,000 Capital works deductions (e.g. $2,500 per year)

+ $10,000 Cost to sell including legal fees

$367,000 COST BASE

The property goes under contract in May 2021 for $450,000.  Less the 'cost base' of $367,000 = $83,000 Capital Gain. 

As the property has been owned for greater than a year, the discount capital gain rules reduce the capital gain to $41,500.  This amount will need to be declared in the tax return in the year in which the contract to sell the property was made and tax paid upon this amount accordingly.   To read more on this topic, visit the ATO website here.

3.  How much money will I make? 

To determine how much money you will make, you need to deduct all the expenses you incurred on top of the purchase price (stamp duty*, conveyancing, legal fees and the cost of any property improvements).

* Stamp duty is a significant expense at purchase - particularly in SA.  For example stamp duty on a property purchased at $380,000 is currently $15,330 – so an important expense to remember.

To access the Revenue SA stamp duty calculator, click here.

Expenses you will need to deduct from the sale price to work out your net gain are;

• Cost of asset at purchase
• Less Acquisition costs (stamp duty, loan set up fees, conveyancing/legal fees, lenders insurance etc)
• Less Capital Gains Tax liability (read on for more info on how to calculate this)
• Less Payout of mortgage
• Less Payout of any early loan repayment penalties
• Less Sales and marketing fees
• Less Conveyancing/Legal fees of sale

4.  How will selling the property effect my tax returns?

For many investors, there are a number of deductible items you can claim at tax time for your investment property, such as;

• loan interest
• expenses (property management fees, insurances, water, rates, repairs etc)
• decline in value/depreciation deductions
• capital works deductions

Once you dispose of the asset, these deductions will cease, possibly increasing your tax liability for future years.  Talk to your accountant to determine the ongoing effect.

5.  What is my investment strategy moving forward?

Once you are out of the property market, do you have a strategy to assist you to gain wealth into the future?  You may be considering shares, topping up your superannuation contributions, replacing the investment property with a higher yielding property, or focusing on reducing your home debt.  If you don’t have a strategy, consult your accountant, or seek advice and try and stick to it. 

 

Whatever your reason, if you are considering buying or selling an investment property it is wise to seek advice from experts that specialise in residential investing.  Talk to us here at Trove, your accountant, finance broker and adviser to ensure you have the best strategy and structure for you and your family long term.  After all buying or selling a property is a big (and costly) transaction that requires careful consideration.