Are you considering selling property in retirement?
Many retirees are blindsided by hefty taxes when they don’t plan ahead. Whether it’s an investment property or something inherited from a relative, the profits could significantly boost your retirement lifestyle.
However, understanding the implications of capital gains tax (CGT) is crucial for making informed decisions.
At First Financial, we specialise in guiding clients through complex financial processes and developing tailored, tax-effective strategies.
Our goal is to maximise your returns and ensure that your retirement years are rewarding and enjoyable.
Selling investment properties in retirement
Investment properties are a common asset among retirees, offering significant returns through rental income and long-term capital growth. However, when it’s time to sell, capital gains tax (CGT) can substantially impact the proceeds.
Firstly, what is CGT? It is a tax on the profit made from selling an asset, calculated as the difference between the purchase price (plus associated costs) and the selling price.
If the property has been held for over 12 months, you may qualify for a 50% CGT discount, which can significantly reduce the tax burden. Effective tax planning can significantly impact your CGT liability.
Selling in a year with a lower income (which includes the age pension) may reduce CGT. Additionally, capital losses from other investments can offset gains. Assets held in a superannuation account are CGT-exempt when sold within the pension phase, and earnings in this phase are tax-free. You can currently hold up to $1.9M in a superannuation pension account.
Inherited properties and CGT
Inherited properties come with both sentimental and financial considerations, as well as unique CGT challenges. The tax implications depend on factors such as the property’s use, how long it was held by the deceased, and what you choose to do with it afterwards.
If an inherited property was the deceased’s main residence and is sold within two years, it may be exempt from CGT.
However, if you keep the property as an investment or sell it after two years, CGT will apply based on the property’s market value at the time of inheritance.
For a comprehensive overview of the rules governing CGT on inherited properties, please refer to the ATO.
Understanding these rules can be complex, so consulting a financial adviser is crucial. An adviser can help you explore all options and their implications, ensuring you make informed decisions that align with your financial situation and long-term goals.
Owning property within an SMSF
Selling property within a self-managed superannuation fund (SMSF) during retirement can be highly advantageous, particularly during the pension phase. In this phase, where the SMSF is dedicated to providing retirement income and all members are receiving a pension, capital gains from property sales are generally exempt from CGT.
In the accumulation phase, the SMSF is building assets for retirement and is taxed at 15% on earnings. When selling property in this phase, the CGT rate is 15%. However, if the property has been held for more than 12 months, the effective CGT rate can be reduced to 10%.
Strategically timing the sale of SMSF property to align with the pension phase can result in considerable tax savings.
It’s important to adhere to superannuation regulations, including minimum pension payments. Consulting a financial adviser or SMSF specialist can help manage these aspects and optimise your retirement outcomes.
Talk to the retirement planning experts
Deciding whether to sell an investment or inherited property can be daunting, especially with tax implications in mind. However, with proper planning and advice, you can manage CGT effectively. Begin by defining your goals and understanding what you want to achieve.
At First Financial, we specialise in guiding retirees through property sales and CGT to maximise their advantages. We also assist those planning for retirement to ensure their investments are structured for optimal tax benefits.
To learn more, speak with one of our friendly financial advisers or SMSF specialists today.
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