Property can be a great, low-risk investment that yields excellent returns, but like any type of investment, there will come a time when you decide you want to sell up and cash in on your investment.
If you’re considering selling your investment property but first want to find out more about what it involves, this guide will fill you in on everything you need to know.
Deciding When It’s the Right Time to Sell an Investment Property
While every investment property is different and there is no hard-and-fast rule about what is the best time to sell, generally, the longer you hold onto an investment property, the larger the capital growth will be and the greater the financial return.
In most scenarios, you’ll most likely need to have owned the property for at least five years to be able to recoup the costs associated with buying and selling the property, but ideally, you’ll want to own it for at least 10 years to be able to generate a decent return on your investment.
While holding onto your investment property for as long as possible is generally the most effective strategy, on occasion, it can make sense to sell the property sooner rather than later. Some reasons why selling might be the best option include:
- You’re retiring – Centrelink views income from an investment property as income which could reduce your age pension entitlements.
- You want to free up capital for other things – You may want to invest in other things that are generating stronger returns, or you may want to use the money for things like travel, to buy a boat or RV, to pay for a wedding, or to help out the kids.
- The property isn’t performing well – Poor capital growth on a negatively geared property or difficulty finding quality tenants could indicate that it’s smarter to divest than to hold onto the property.
Still unsure if you’re ready to sell? Have a read of this blog post which discusses whether it’s smarter to sell or rent out your property.
Do You Have to Pay Tax When Selling Investment Property?
Property investments can be a great way to tap into valuable tax deduction benefits, but it works the other way when selling. In most cases, you’ll be liable to pay Capital Gains Tax (CGT) which is a tax paid on profits earned from the sale of an asset, such as property.
Imagine you originally purchased your investment property for $500,000, paid $10,000 in taxes and fees associated with the purchase, and spent $15,000 making improvements to the property. You then sell it years later for $750,000. You would need to pay CGT on the difference in the property value (the capital gain), which in this scenario, is $225,000. If the property has decreased in value, you’ll be able to claim it as a capital loss.
The capital gain (or loss) will need to be reported in your annual income tax return, and any gains will be treated as income which attracts tax. If you’re not an Australian resident, for tax purposes, you may also need to pay Capital Gains Withholding Tax.
While most sellers will be liable to pay CGT, there are a few scenarios where you may be able to avoid paying CGT or receive a CGT discount, such as:
- if you bought the property before 20 September 1985
- if the property qualifies as affordable housing
- if the property was your primary residence and you rented it out for a short period of time before selling (considered a temporary absence), or
- if the property becomes your primary residence.
How Long Do You Have to Live in an Investment Property to Avoid Capital Gains?
Living in your investment property for a short period before selling may seem like a great strategy, but it’s important to first wrap your head around the rules as it can be a little complicated.
To receive a reduction on CGT, you will need to have owned and lived in the property for at least two of the five years before selling, and not have claimed an exemption from CGT on another property within the last two years. If you meet the criteria, you could exclude up to $250,000 of capital gain from your income as a single, or up to $500,000 as a joint couple.
To be eligible for a complete CGT exemption, the property will need to have initially been your primary residence before you rented it out, and it must have been rented out for less than six years.
It’s worthwhile seeking personalised financial advice to confirm your eligibility for a CGT exemption or reduction before you decide to sell.
What to Do if Your Investment Property is Tenanted
One of the key differences to selling an investment property compared to your primary residence is that the property may be occupied by tenants.
While a tenanted property could be appealing to other investors, it can also work against you. Tenants may not present the property in its best light which could affect the sale price, and a property with an existing lease agreement in place could deter owner occupier buyers that want to move straight into the property.
If you do decide to sell the property with tenants, it’s important to ensure you:
- notify them of your intention to sell before you list the property
- provide ample notice of any inspections (usually at least 24 hours written notice)
- be flexible to work around the tenants’ schedule, and
- keep the tenant updated throughout the sales process to maintain a good relationship.
This blog post includes some more helpful tips and information about selling a tenanted investment property.
The Smarter Approach to Selling Investment Property in Australia
In between agent fees, conveyancing fees and marketing costs, selling an investment property can be expensive. Then add in the cost of CGT and you’re looking at handing over a hefty sum of money!
Anything you can do to reduce the costs associated with selling investment property should be welcomed with open arms—and that’s where PropertyNow can help.
We can help you get more out of your investment by helping you to sell the property yourself to avoid forking out for expensive agent fees.