My husband and I have an investment property that is neutrally geared (due to the low interest rates and high rental income we're currently receiving). However, that would change should rates increase (our mortgage is sitting at about $450K). Are we better to sell the investment property (as it's made a capital gain of about $300K in the last three years) and buy two smaller properties instead (so the negative gearing opportunities are better)? I'm not working at the moment but we do have some capital in our house we could dig into should we need to.
Top answer provided by:
Brett Dillon
Dear Clinton,
Thank you for your question.
Investment decisions should be based on the expected return from the investment any potential tax benefit should be considered a bonus and not drive the investment decision. If your existing investment property is well located, has a reasonable rental yield, is in high demand from tenants, is in good condition and has good growth prospects, then it probably remains a good investment.
If the existing property were sold there would likely be considerable capital gains tax to be paid. This is calculated on the difference between sale price and buying price (less buying and selling costs). As you have owned it for longer than 12 months then 50% of this capital gain would be added to the owner’s tax return as income and tax is paid at your marginal rate. (Your accountant would be able to calculate this for you.)
Transaction costs are also very high with property. Selling incurs real estate fees and solicitor’s costs. Buying is even higher with government stamp duty, building reports and solicitors costs.
You have not given any information about your personal situation, ages, your husband’s income or other investment assets. In helping you make these major decisions, a Financial advisor would normally also consider:
- the time frame for working and when you are planning to retire.
- how much income you need to meet your lifestyle and living needs when you stop working.
- what other assets are available to generate this required income.
- any potential Centrelink benefits.
And importantly:
- does the proposed investment help meet these objectives in the time frame?
Just because an investment is a ‘good investment’ doesn’t mean that it is appropriate for everyone! A rental property may be great for a young couple with high income and a long time frame to build up other assets and be able to pay down the loan before retirement. The same property might be totally unsuitable for an older couple just a few years from retirement if it doesn’t generate enough income to meet their retirement objectives, they have no other significant investment assets or they cannot pay down the loan.
Each needs to be considered from an individual ‘client needs’ perspective. As most clients can receive tax free income from their superannuation in retirement, there is often no tax benefit for them entering retirement with significant debt.
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
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Comments2
"Great answer Brett to a very common question given millions of Australians now own investment properties thanks to the boom over the last 2 decades. "
Daryl 14:52 on 09 Jun 17
"Excellent response Brett, it's a great example of a common question often posed. The above shows the broader issues that need to be considered but are often overlooked for anyone that is not receiving financial advice."
Todd Kennedy 14:01 on 09 Jun 17