Strategy: Sell a property - 10 reasons to consider selling

Many investors have a ‘never sell’ approach to property. But there may be legitimate reasons to sell a property and this can be part of your overall strategy.


Here are some reasons to consider selling:


a) Get rid of a dud

If it is not performing, why keep it? There is an opportunity cost of holding a poor investment because the capital could be producing more elsewhere.


b) Fix a bad loan issue

Many people that I see have mixed their loans or have paid off main residences and then moved out and rent them. In these cases, selling the property can be more tax effective as the new property could be more tax effective. Selling to a related party is also an option.


c) Fix bad ownership structure

Many people have poor ownership structure. I have discussed this here:

Example of How poor Ownership Structuring Can be Painful. An Example of How poor Ownership Structuring Can be Painful.


d) Estate planning

How a property is owned and funded will have an effect on estate planning. An example where selling may be preferred is where there is a property held by a discretionary trust and there are 2 children. In certain circumstances it might be better to sell the property before death of the controller or the person who set up the trust.


e) Use proceeds to pay down non-deductible debt

Selling can allow for great debt recycling by using the funds released to pay off the non-deductible debt and then reborrowing for a new property. See

Tax Tip 28: Selling an IP to pay down non deductible debt Tax Tip 28: Selling an IP to pay down non deductible debt


f) Land tax

Many people are suffering from excess land tax due to the ownership structure of the property. Land tax could be reduced in NSW by one spouse buying out the other of a jointly owned property for example. See

Tax Tip 124: NSW Land Tax: Comparison of Joint v Single Ownership Tax Tip 124: NSW Land Tax: Comparison of Joint v Single Ownership


g) No serviceability

Selling may also free up borrowing capacity so that another property could be bought.


h) Security Substitution

It is possible to sell a property yet keep its loan open to be reused with another property. So not having the ability to borrow any more is not necessarily a reason why you should not sell!


i) To invest in a higher yielding asset

If you were to sell and pay any CGT and invest the post tax proceeds into a higher yielding asset this can greatly improve cashflow – even after the tax is paid. This can allow for retirement to come quicker too.


j) To live off capital gains

Capital gains are currently taxed at 50% of what income is taxed, so it is more tax effective to live off capital gains rather than income. A person with a property portfolio could sell one property every 5 years or so and live off the capital gains for this long. Once the money is nearing its end the next property can be sold. Eventually the person would run out of properties to sell, but this doesn’t need to be the case because when selling the loan could potentially be kept open and used to purchase another property. See

How to Mini-Retire on Just 4 Investment Properties How to Mini-Retire on Just 4 Investment Properties

 

Some would be asking the question if your on the wrong side of 60 years of age,which will run out first your investment income streams of your life on this earth..

 

That certainly should be considered.

 

I sold 2 last tax year and just sold another 2. Selling some that have done their dash for now, and are older so likely to be due for some serious maintenance. I keep some cash out for a buffer and reinvest the rest for better returns.

 

You forgot Portfolio balance. (Risk management, Capital and Cashflow) If one sector booms your capital can be too concentrated , unforeseen circumstances could cause by negative adjustments to yield.

 

In the past 3 months I have sold 1 and bought 2. It was more about what I could do with the funds instead of holding on. I purchased a good cashflow apartment (I have others in the same block) and another with a large section that needed some work on the house. It was a strategic move for higher cashflow and potential in the land. Last property I sold was 16 years ago. The bonus was that it was freehold so no chance of the bank clawing back funds.

 

Hey, would be fantastic to catch up again later in the year when I'm next in NZ. Very interested to hear what you've been buying. I'm doing a second dwelling in Motueka so will over in October, and hoping to try a trade or two

 

Great. I look forward to meeting up again.

 

Thanks Terry for this wonderful post. I only read it today and it's so helpful to find out that four of the reasons you listed here were what I thought of when I put one of my investment house on the market this week. I bought it for $545K and is hoping to sell it for $900K in the current market. I'm thinking of 1/ investing in higher yielding assets 2/ live off in some capital gains (I'm 50 years old). I'd like to ask you for ideas / suggestions on higher yielding assets. The other question is about offsetting the capital gains on the new investments. Let's just say I'll make about $300k on this property before tax, can I only reinvest this $300k on other assets, and I do not have to pay tax on my cost base of about $600k, right? thanks Terry

 

wrong. You will pay CGT on the taxable gain.

Actually I am not sure that I understand what you are saying here. Can you rephrase it?

 

Thanks Terry for a quick reply. So if the cost base was about $600k, and sold price is $900k, then the taxable gain is $300k right? My questions are:
1/ How much tax is payable in this case for the one beneficiary of the discretionary trust that is holding this property? (held it for 6 years)
2/ If instead of distributing to beneficiary, the trust however reinvest this capital gains of $300k, will there be any tax payable? Assuming the whole $300K of gains go to the new purchase of house/units or even financial instruments like shares...etc.
3/ You mentioned in one of your other Strategy posts, that the trust can save by distributing to minor beneficiaries via Testamentary trust, how can this be achieved?

Thanks Terry

 

Other reasons to sell
- Land tax surcharge
- Land tax absentee
- Change of residency and potential loss of CGT exemptions
- Change ownership (Yes...Sale of some or all of your interests to a spouse or another entity). This may "retain onwnership" but fix defects and issues for land tax, tax or other reasons
- Retirement rebalancing eg To invest proceeds in super ina tax sheltered environment, the new downsizer opportunity etc
- Tax planning eg small business CGT concessions
- Illness or health concerns
- I about to be sued / jailed etc and my lawyers tell me to sell
- Pay off a tax or other significant debt. A financial strategy that releases equity that you can plan is better than a creditor actioning it for you through bankruptcy.

 

1. Is the trustee holding the property or the beneficiary?
If held by the trustee of a discretionary trust the captial gains income can likely be distributed to an individual who would pay tax on it, it gets added to the individuals other taxable income.

2. Yes 45% of the income

3. testamentary discretionary trusts can only arise on death of someone who has set one up in their will.

 

Tax would be paid by the benificiary, assuming an individual, at their marginal tax rate on $150k. To make it simple allow around $70k.

There is no way of deferring the tax on the $300k. If the trust does not distribute the cash then it will generally pay tax at the highest marginal rate. There are rollover provisions available to certain business assets but real estate and financial assets dont generally get any exemptions.

I am sure Terry can correct my basic explanations above.

 

Thanks Terry.
The trust holding the property. Do you mean 45% of the $300k capital gain, which is $135000 is the tax amount the beneficiary needs to pay? I'm confused. So there's no other way to roll over the whole capital gains, even the whole amount is to be used to buy new investments?

Thanks so much. L

 

Thanks MRO. So, it's around $70K of tax payable according to your calculation? I was thinking if I reinvest the whole capital gains of $300k, then I don't have to pay tax!? It looks like I've to pay tax first, then reinvest whatever left over?

 

If the trustee does not make any beneficiary presently entitled to the income of the trust the trustee will pay tax on it at the top marginal tax rate.

Tax must be paid on income even if the money is reinvested - if you sold a house and used the proceeds to buy another property you would still be taxed.

 

Assuming the beneficiary is entitled to the 12 month 50% CGT discount on the $300k gain, the taxable amount would be $150k and the tax on that would be around $70k.

 

k) to be able to extend all other loans back to 30 years

Someone might have several loans which are all 'old' now and they want to take them back to 30 years to reduce repayments and allow for earlier retirement or debt recycling into a new main residence.
Sale of one property could allow its loan to be paid out and then serviceability to be reached.

 

Not to mention P&I cliff for some (like me).