Living in retirement with NSW Land Tax

My uncle and his wife are recent retirees in in their 60s. Conservative in investment profile they have a dilemma in their retirement years, which is to live with punishing NSW land tax.
This is because, in addition to PPOR, they have an investment property, which has a land value of about a million dollars, and which, after land tax and other expenses, fetches them about 15k return per year.

Their PPOR and the IP are modest, old-style 3 bedders. Both properties are in Sydney, paid off and are held in their joint names.

To be closer to family in retirement, they are thinking of buying a third property
(again, in Sydney) and rent out their current PPOR, which, of course, will attract further land tax. The land value of their PPOR is a tad below a million dollars.

If they proceed with their plan to acquire a third property, all they will have for their retirement
income is the rent from the two properties. The so-far-PPOR-but-soon-to-be-rented-out property will
fetch them, after land tax and other expenses, about 7k. So all up, their income would be 15+7=22k. They are frugal people with modest lifestyle, but would have liked a retirement income of about 30-35k per year, in line with aged pension for couples (because of asset test, they won't qualify for pension).

The family advised them a few things, for example, to get rid of the PPOR, buy something newish as their new PPOR and buy a second IP (not in joint, but in one of their names to reduce the land tax a bit). Further, they were advised to put in a granny flat in their existing IP, which will get them an additional 15k post expenses.

Being conservative folks, they are, however, not keen to part with any of their current two properties, but are not averse to putting in a granny flat in the IP (though, the Uncle feels GFs are ugly eye sores!). The idea is that even after paying further land tax, but with the addition of a GF, they might be getting about 37k per year (15+7+15=37k), something they can live with.

I wonder if the brains trust in this forum has alternative ideas to help this elderly couple.
All ideas will be treated as thoughts/opinions and not advice.

Thank you all for your kind thoughts.

Ric.

 

They could seek financial advice about selling up and investing in something which produces more income with less holding costs. They may be able to incorporate to super strategies and boost their incomes and potentially pensions.

 

Assuming a building value of at least $300K on that $1M piece of dirt, that $1.3M invested in an ASX200 index fund would earn approx 4% or $52K pa in dividends and another $22K in franking credits to go towards your tax with no tenants, no maintenance, no land tax, no insurance, no depreciation schedules, no property managers and no vacancies to deal with. That's 3.5x the income for far less management heartache. I know which one I'd choose!

 

They could possibly contribute $300k each from the sale to super, that'll provide $30,000 tax free in pension mode (If they earn 5% pa). With the balance, buy the new ppor (& provide for CGT if any) .

Old people and risk - really? What about CGT on sale?

 

Risk of starving on that low income do you mean? They could earn more with it in government guaranteed term deposits spread across the major banks for next to no risk.

CGT on sale would be 25% worst case. 75% (left over) of 3.5x their current income is still 2.6x better.

 

They could sell the main residence tax free and move into an IP perhaps.
If not the income from the shares could be more than from the property even after CGT is paid.

see
Strategy: Selling Property on Retirement to buy shares Strategy: Selling Property on Retirement to buy shares

 

The older retirees are the really big losers from mega low interest rates .
In the older days they could have just sold it, parked most of the money in a high interest account with very little risk ,lived of the interest and even possibly saved the government money in pensions and freed up the housing for the next generation.

 

With higher interest rates 30-ish years ago and less capital growth, their Sydney properties would not have increased in value as much as they have in the last few years.

I'd be happy to pay the CGT on sale of the IP to get rid of all the hassles associated with it. Sooner or later any retiree is going to have to start to draw down on their capital if they only have a meagre income from it. You cant eat, have fun and pay for medical expenses with a spare three bedroom house. Please try to persuade your uncle and aunt that their values dont necessarily apply in the new 21st century economy. I have found the various planning for retirement seminars that my Super fund puts on are very helpful opening eyes and mindsets to the various ways we can fund our retirements.

(I'm their age too so I have been researching how to fund retirement)

 

Going back a step - if they have funds to buy a 3rd property, why would they want to put it into a house when they could buy another investment that generates more income?

 

That is exactly what we are trying to teach them.

 

• They're old & risk adverse.
• They understand bricks & mortar investments/don't understand the alternatives = extra risk
• Don't realise the benefits of liquidity

 

Knowing the age group and their general risk appetite this is what I would suggest based on their desire to move closer to family as they age and assuming they do have the cash already to do that.

1. After July 1 sell PPOR as it's tax free asset and holds no negative gearing upside to turn it into an IP
2. Use money from PPOR sale to make large contribution to Super fund (@Scott No Mates raised same point). $300k each would probably leave them with $700k or so left over from sale of PPOR. This additional $600k in Super would help generate a self funded pension Contributing the proceeds of downsizing to superannuation
3. With the $700k use $150k of that to put granny flat on other property to increase it's cash flow to be almost equal to what PPOR + IP rental income would have been. Approx $30k income
4. Put the remaining $550k into term deposit - maybe get 2%
5. Use their current savings to buy the new PPOR close to family. They could chose to use some of the PPOR remaining $550k if they really wanted to improve it.

So in summary their new income would be:
- potential pension from Super of at least $10k (depends on their balance) but if they are retired then I think it rolls to 3% pension
- IP with GF income of around $30k
- term deposit income of around $10k
Total is $50k which is more than they need so they could keep rolling the interest in their term deposit over to increase it and start using it when they need to.

 

They may also want to pass on the houses to the kids or grandkids.
We have heard it quite often from friends ,that the investment houses are for the kids when they grow up.

 

The whole point of investing for retirement is to spend some on retirement. I would think the best way to avoid land tax is to sell the IP and keep their home? Or the IP is worth keeping and they keep paying land tax.

I'm willing to bet the property will be held until it has to sold however and when that happens it will be an easy decision.