To sell or not, a question from an accidental investor looking for a decision switch

Okay, I know it seems a bit lazy to put this question out there, for understand everyone has to quizz and anguish personally. However, I can't seem to make a confident decision either way to sell or hold and time needs me to (have talked to accountant and they said either way a fair call, urgghh! ). So thought I'd put it out there on the chance a recommendation pushes my tooing and froing to a merciful rest....... (ie sorry about what is probably a rather generic question and I have read other responses, but need my own). So we purchased our residence, a nice small older style sandstone cottage in a good inner Adelaide suburb that we bought 12 yrs ago which we then had to leave to work OS. We have not purchased another property, so for capital gains, we have 6 months (has been 5 1/2yrs) to sell and pay no CGT (approx 45k tax on 850k current value). We have it rented out to a very reliable tenant who wants to keep renting long term. We never intended to be property investors but can now see the great value it has returned to us by holding onto it. So the PROS to KEEPING it are: good character property, good area, scarcity (ie as per Yardley rec) good tenant ........... while PROS to SELLING are : will avoid CGT, didnt mean to set it up as investment property so has a minimal loan on it for tax offset, currently high heated market that looks like it will on the balance of opinions, flatten/fall over next few years.... Regardless of what we do we intend to buy another primary residence in the next couple of years and we are assuming whether we have cash or equity in the investment house it won't make too much difference on getting a loan...... So that leaves me to today, I have a great agent lined up (arent they all ;}) , a couple of months of sprucing it up, and an uncomfortable conversation with the tenant on what should be a journey to tax-free doubling our purchase price upon sale early next year,,,, or do I hold an easy investment property I have, turn a blind eye to possible market flatness/, retraction of the next few years and hold for another 5 yrs ++ ? . Again anything that might help get my brain to one side or the other would be appreciated, Understand it's a decision and often they are very situational and unclear in their deliverance but I can process that in any suggestions..Thanks

 

Biggest issue will be getting back in when u sell. Why not keep until u are compelled to sell.

Sell to retire, to reinvest, to upgrade sure.

Should be positive geared now, so just collecting with no additional plan would be less useful that accidentally making longer term gains via keeping.

Edit: also wrestling with same question re: our Adelaide property.....

 

This is an example of allowing a small decision to lead a big one.

45k in tax? Who freaking cares.

Make the most optimal decision based on the big picture, not whether you like the colour of the carpet or not.

 

Unless you have a better use for the funds why would you sell? What are you going to do with the proceeds. If you are planning on getting back into the market you should stay in the market. If property prices drop and you are buying that is a bonus. If they go up and you already own a house that is a bonus too as you have equity to use. If you keep the house and extract as much equity as you can and invest it in may be a REIT to increase exposure to market and increase funding including servicability for when another property is bought perhaps you can buy a superior property or be earning extra funds to make repayments. Personaly I would take out equity and buy growth shares and perhaps have a 50% deposit, or even more by aiming for shares that can 3x in 5y. An alternative would be to buy something with growing yeild to help servicability when you are ready to purchase.

 

Right you do have to be able to see a big picture, not the view that is immediately in front of your nose. 45k can compound to be a a 45k plus oportunity cost every year. It can grow to be a massive cost much less could set you up for life. Penny wise pound foolish rings true. 45K or 450k it is attitude and small things that build wealth. It is not what you got but what you do with it and mind set that counts.

 

It all starts and ends with your goals. What fits in better, selling or holding? Or possibly extracting equity to buy.


Pension is poverty peanuts. Don't forget that. Plan for your future/retirement

 

Sounds like a beautiful house in a fantastic location. I wouldn't sell it. Beautiful old houses have been under-rated in Australia but I think their day will come soon.
On the other hand, the way banking is at the moment, you will get a better loan by selling, unfortunately.
I think its easier to let go of a bland house.
I actually find it hard to think Only in dollars and cents, so it mustn't be only about that.

 

Don't be afraid of CGT, you've got 6 years of tax-free gains anyway regardless of if you see it now or later.

But personally, I would sell it once I'm ready to get the PPOR. Sounds like the tax situation isn't very good, if you use equity from the IP, you're going to have large amount of non-deductible debt against the PPOR, and minimal deductible debt against the IP.

So I think I would sell it to buy the PPOR, then go in again to buy a new IP.

I would also do it sooner rather than in 2-3 years, as this has the advantage of always using your PPOR exemption.

Only one consideration of course, depends all on your lifestyle and goals

 

Thanks for that great response. However my accountant has said the exemption rule is lost altogether if not sold in the 6 yrs, ie if we are holding post 6 yrs and sell the day after we would be due to pay tax, less 50% for holding for over 12mths and then less the capital increase the property had pre the 6 years when we owned it and didnt rent??

Can you also explain when you say "would also do it sooner rather than in 2-3 years, as this has the advantage of always using your PPOR exemption" if you can

Thanks again

 

Not selling it may just mean FUTURE growth will be subject to some tax. The maximum you will pay is 23.5% of each dollar of extra profit.You will benefit by 76.5%
Only sell if you HAVE to sell. Sell it when you are 65 and the tax rate could be super low too.
If you need to access some of the equity for other decisions you could borrow against it.
You doubled it in the past 10 years so why not wait another 10 and double it again.

Arguing you save by selling without CGT is like saying you prefer to be unemployed than earning a decent salary.

 

What a load of rubbish. Change tax adviser if they actually said that. The absence rule maximises at 6 years unless you are departing Australia and ceasing tax residency it isnt lost. That just wrong. . You could also RESET it by moving back in and then later moving out but thats not always going to work. The past 6 years is locked in and only FUTURE growth may be subject to max 25.5% tax. What sort of tax adviser are they ?

 

Thats very interesting!! Actually my current accountant said that (hes young chap), wasn't super keen on his advice so saw another highly recommended one on Monday, and she reinforced the idea that if we were still holding after 6 years and then sold the exemption rule would not be applicable for us?,,, but totally get what you are saying and makes more sense the 6 yrs are cgt free if you dont buy another PPOR (in the 6 yrs) regardless. We are both permanent Australian citizens residents but my partner did earn only NZ income for 4 years, I wonder if that will have an effect re Aust Tax resident? Might need to try another accountant, more like you? ;]

 

Thanks to everyone for your feedback, greatly appreciated, will still be keen for any more. The clear the majority (with exceptions) recommend to hold and use equity from IP to finance the next PPOR. My consideration was that at a current premium sale prices and with my "accidental investment property" being poorly leveraged against a minimal loan, it might be worth cashing out, buying the PPOR and possibly a better fiancialy set up investment property over the next couple of years (possible in a more relaxed buying market, although I do think the current one ticks so many boxes). I'm extremely grateful for the information that, post my 6 years CGT rule, that I dont lose it after 6 years it just no longer applies to pro-rata gain beyond the 6 years, maybe its me, maybe my accountant but I was not thinking that way. I do also realise even with CGT of 45k its not a deal-breaker, but in my head it was a factor in thinking of wiping the board clean and starting again in a more structured way. Thanks Paul G for clearing up that rule, have emailed you re for some paid advice and I have booked into a recommended mortgage broker on Thursday to discuss implications of buying a PPOR with my investment property pretty well paid off.. Unfortunately, there seems to be no way to reassign debt to the investment property rather than the new PPOR, and I know interest rates aren't great at the moment but can imagine a time when using interest payments as a deduction may be crucial. Again thanks, will update you with decision by end of the week.

 

This is totally incorrect.

see

Tax Tip 109: CGT and Being absent from the main residence for more than 6 years Tax Tip 109: CGT and Being absent from the main residence for more than 6 years

 

Thanks so much Terry, can clearly see now> Ps all the examples including on ATO use as eg if the property is sold post 6 yrs, would it be the same calculations if another PPOR was purchased 6yrs ? Thanks

 

If could be if the exemption was not going to be claimed on that property for an overlapping period.