Why it’s worth selling your investment property before you retire
Reviewing your investment property portfolio before retirement could save you serious tax dollars and potential headaches. Timing the sale of your investment property before retirement might save you even more with superannuation contribution caps set to rise for the first time in three years.
While owning an investment property might form a key part of your wealth building strategy, it is worth reviewing its long-term plan and how it fits into your overall strategy for achieving your income needs once you stop working.
On their own, property rental yields are generally not enough to cover your lifestyle needs in retirement and there are some considerations you need to be aware of:
Many people plan to sell their investment property once they are retired so that they can minimise the tax consequences, seeing as they won’t have employment income putting them in the higher tax brackets.
A strategy worth considering is the lesser known “carry-forward” concessional contributions to super. If you are considering selling your investment property as part of your retirement plan, this could be one for you. The increased super contribution limits from July 1 will make this more attractive.
These are the two main super contribution strategies to consider.
Concessional contributions to super: These are “before tax” top-ups to super that help to increase retirement savings. They include the super paid by your employer, salary-sacrifice contributions and personal contributions for which a tax deduction has been claimed.
The concessional contributions cap for the 2023-24 financial year is $27,500. This is set to rise to $30,000 from July 1, 2024.
You also have the ability to “carry forward” the unused amount for use in subsequent financial years. Unused amounts accrued from July 1, 2018 can be carried forward on a rolling basis for five years.
Two things you need to know:
Non-concessional contributions to super: These are generally “after tax” contributions. The current non-concessional limit is $110,000 per financial year. This will rise to $120,000 from July 1, 2024.
Up to and including the year you turn 75, a bring-forward provision applies. This allows you to contribute up to $360,000 in that year. However, the total non-concessional contributions in that year and the next two financial years cannot exceed $360,000.
To access this $360,000 limit, your total super balance at the end of the previous financial year must be under $1,660,000. If your balance is higher, a lower cap may apply.
Unlike concessional contributions, when non-concessional contributions go into super, there is no contributions tax deducted.
Case study
Max and Heather are in their early 60s, they are still working and intend to do so for another couple of years to keep building their retirement assets. Max earns a salary of $190,000 a year plus super, he has a super balance of $490,000. Heather’s annual salary is $60,000 plus super, she has a super balance of $270,000. They have an investment property they own in
joint names, generating annual rental income of $40,000.
joint names, generating annual rental income of $40,000.
They sell the property during the 2023-24 financial year, realising a capital gain of $800,000. Selling the property increased their taxable incomes by $200,000 each (the gain is split equally and they held the property for longer than 12 months so they are eligible for the capital gains tax discount of 50 per cent).
After paying down the investment property loan, they had proceeds of $1 million available.
After checking their concessional contribution histories and the unused cap available, they made concessional contributions of $57,000 for Max and $121,000 for Heather. They also made non-concessional contributions of $330,000 for Max and $330,000 for Heather.
By selling the investment property and making super contributions in the 2023-24 financial year, the overall tax payable will be around $210,000. This takes into account the additional 15 per cent contributions tax. The couple can get a total of $838,000 into the super environment.
However, if they delay the sale of the investment property and make super contributions in the 2024-25 financial year (ie, implementing both in the same financial year), the overall tax payable will be around $203,000. Again, This takes into account the additional 15 per cent contributions tax.
They can get a total of $896,000 into the super environment in the 2024-25 financial year. By delaying the strategy, there is a tax saving of around $7000 as a result of the revised stage three tax cuts from July 1, 2024, and they can get an additional $58,000 into the concessionally taxed super environment. (Note the concessional contributions are reduced to take into account the increase in the employer super guarantee rate, and the high-income earner (Division 293) tax has been excluded as this would not change.)
The examples are also simplified to assume the couple is only utilising one financial year to get as much of the proceeds into super (ie, not doing one year of non-concessional contributions followed by the bring-forward in the following year).
