Cancelled auction got me thinking….

I was interested in buying a property as a PPOR that was due for auction a couple of weeks ago. It was pulled at the last minute. I bumped into the retirement age vendor at the property since and he indicated that it was an IP and pulled from auction due to tax bill reasons.

I checked http://house.ksou.cn/ and it appears the vendor had bought the property on 1996 for $360k. It was expected to sell at auction for $1.25m+ , so a gross capital gain of approx. $900k.

He was now pulling it from auction due to a tax liability of anywhere up to $216k.

Aside from the fact that one would have thought that the vendor would have thought about the tax implications prior to placing the property on the market it got me thinking...

Obviously I know nothing of the vendors personal circumstances so the following is just supposition …. He was going to sell the property, pay approx. $24k in selling fees and up to another $216k in tax to realise the capital gain – which he would probably be investing other assets to help fund his retirement. (yes I know he could well have arranged his tax affairs to minimise the tax payable and that the above represent the worst probable tax payable).

It got me thinking that I may be better off deciding what kind of assets I would want to fund my expenses in retirement and buying those types of assets now with a view to keeping them into and through retirement so that I don’t have to sell and pay applicable taxes and re-invest, all at the mercy of market prices at that future date.

Obviously if you’re happy LOR in retirement then keeping your RIPs into and through retirement is fine, but I read a lot of peoples posts about how they plan to sell down their IPs and move more into CIP’s or shares or fixed interest etc in retirement.

Just thinking out loud.

 

Yes thats right. Just assume any capital gain will be taxed at 25% and this will eat intonthe amount of capital available to generate an income.

One strstegy is to sell the PPOR tax free and move into a rental property paying the loan down and living on the rest until rents increase enough to live on

 

im not a tax expert, but I have met a few people who intend to keep on buying, assuming properties keep on rising, keep on refinancing as long as possible

and once you cant get anymore due to age etc. to give it to their kids whie eliminating/minimisng CGT or transfer taxes

and if they can get max finance late in their life to use the funds to live the high life and take the debt to tehir grave

does this work?

 

How can they take the debt to their grave?

The banks would surely either come after their estate, or if their kids inherit their estate, they would be liable for the debt. Banks don't hand out money for free...

 

When a property with debt is passed on the debt has to be either repaid or the inheritor has to qualify for the loan.

Also keep in mind unless you specify otherwise in the debt the debt comes out of the property it is secur3d by not the property it was used for.

 

Exactly. Either they sell and pay huge CG tax or they have a whole heap of equity that very likely, they can't gain access to. This line of thinking has effected my decisions too.
The gains made are not as large as they first appear.

 

He may decide to wait until another tax year when he's retired on a small income and the the CGT will be a lot smaller.

 

Or maybe people should stop being so greedy and just pay their fair share of tax.

Another option would of been to do more research earlier on in the accumulation phase and maybe buy an extra property. selling an extra property after all those years will deliver a few extra dollars to make up for the tax bill

 

Yes he mentioned that this is what he is likely to do. Still a $900k CG is still going to hit hard in tax even if it is his only income, gets a discount and distributed through a trust.

 

Plus he runs the risk of getting caught in the "Great Australian Property Crash"!!!
Seriously though he does run some sale price risk.

 

I've wondered about that - is the CGT done on your marginal tax rate without the CG income calculated, or is it just added to your income for the year?

For example, if you retired and earned $10,000 taxable income for the year, then decided to sell a property that provided you with $100,000 taxable CG, then are you up for an income of $10,000 and thus 0% CGT, or is your income $110,000 and thus in the 37.5c bracket?

 

Income tax on $110k

 

Regarding the op $900k gross capital gain, after the 50% discount the gain would be $450k. If it was in joint names it would be $225k each.
If it was sold in retirement with little or no other taxable income couldn't they then each make a substantial contribution to super under the cap and reduce tax payable further?

 

Yes. But the super caps are a max of $35k deductible contributions. Sonthey would still have a substantial tax.bill. perhaps this could be teduced further by prepaying interest of some of their other loans

 

It's a great cg but it shows that there is some benefit in holding multiple cheaper assets which can be sold off over a number of years to limit tax payable.

 

Like shares!

 

And I'm sure everyone has a few capital losses holding them they have carried forward which might come in handy in this situation.
I know I have.

 

This line of thinking has occurred to me recently... At the moment I am looking for CG... But in reality with people living longer than ever it is the ongoing income that will let me retire (and have the retirement sustainable). Current thinking only a handful of resi then swap to comms for the higher yields and less holding costs.

 

I would gladly pay 2,000,000,000 in CGT from my portfolio. If anyone wants to assist me by donating properties PM me, you will not have to pay CGT for it.

Do not understand why people are so hung up about paying tax it is one of only 2 things that are certain in life.

However there are smarter ways of paying tax