Making the decision to sell an investment property isn’t easy. You want to make sure that you’re selling at a time when you’ll reap the highest profits of all the sale, and that comes down to knowing the property market inside and out. And if you do decide it’s the right time to sell, it’s important to work out the best exit strategy so you can save on taxes and ensure a smooth sales process.
To help make the decision and sales process easier, we’ve created this complete guide to selling an investment property.
Should I sell my investment property?
There are numerous schools of thought when it comes to determining the right time to sell an investment property. Some experts say that the longer you can hold on to an investment property, the greater capital gains you’ll access when you eventually sell.
On the other hand, maintaining an investment property can be costly, and changes in your circumstances could mean it’s wiser to sell the asset and use your cash elsewhere. And if you manage to sell when the market is at a peak, you could access enough capital to invest in another property with more growth potential.
So, if you’re wondering “Should I sell my investment property?”, here are some of the situations in which it could be a good time to sell:
- When you retire – One of the most common reasons to sell an investment property is to free up capital for your retirement. Keep in mind that when you sell an investment property after retiring, it can affect your Age Pension entitlements.
- When you aren’t getting a good return on investment – If your property is negatively geared and capital growth potential is weak, it could be time to use your equity elsewhere.
- When you want to invest elsewhere – If you’ve found an investment opportunity that is likely to provide a better return on investment, then it could be worthwhile selling your current investment property.
- When you want to access a Capital Gains Tax exemption – If you’ve lived in your investment property for at least 12 months in the past six years, you may be able to sell it without having to pay CGT. Past the six-year point, you’ll be liable for CGT.
On the flipside, here are some of the reasons you might prefer to hold on to your investment property:
You bought it recently (less than five years ago) – The costs to buy (stamp duty, conveyancing etc.) and to sell (agent’s fee, conveyancing again etc.) can be expensive. In general, it’s a good idea to hold a property for a minimum of five years to reduce the impact of these costs and realise long-term gains. It’s a solid performer – If the property is getting good rental yields and is positively geared, the case for selling is minimal. High growth potential – Remember than investing in property usually isn’t about short-term gains. If the property has good long-term growth potential, it’s probably worth holding on to. There are tax benefits – In some cases, eligible tax deductions are reason enough to hold on to an investment property.
Selling investment property: Tax considerations
When you’re selling a property that isn’t your primary residence, such as an investment property, you will likely be liable to pay Capital Gains Tax on the sale.
Capital gains tax (CGT) is a tax that is applied to the profits you make when selling an asset such as a house. CGT is calculated by the profit made on the sale of your property minus the costs of buying, maintaining and selling the property. Any profits made on the sale of a property need to be included in your assessable income in the financial year that you sell it.
How to avoid Capital Gains Tax when selling investment property
There are some circumstances in which you could be partially or fully exempt from paying CGT. These include:
- You bought the property before 1985 – Property is exempt from Capital Gains Tax if purchased before 20 September 1985.
- Your investment property becomes your main residence – If you decide to live in a property you bought as an investment, you'll be partially exempt from CGT.
- Temporary absence – If you move out of your home and rent it out, the property is still treated as your principal residence for a period of up to six years, and is therefore exempt from CGT.
- Affordable housing – Property owners who invest in qualifying affordable housing are eligible for an additional 10% discount on CGT.
If you make a capital loss, you may be able to use this to offset other capital gains you’ve made throughout the year.
Selling part of an investment property
Keep in mind that strictly holding or selling your property as a whole aren’t your only two options. Depending on your circumstances and the property in question, you may be able to transfer part ownership of the property to another person or people. There are a number of potential benefits to this approach:
- You’ll pay less Capital Gains Tax
- You’ll have access to additional capital that you can use to invest in other property or elsewhere
- You’ll still stand to benefit from returns on the investment over time
If you’re considering selling a share of your investment property, it’s a good idea to talk to an experienced property lawyer who can offer guidance on the most tax-efficient way to split ownership.
Types of ownership structures
- Outright ownership – You are the sole owner of the property. Your name only is on the deed and you are entirely responsible for the property.
- Joint tenant – You own the property equally with one other person. Together, you both have full ownership of the property. A joint tenant can’t sell their share of the property or leave it to someone in a Will.
- Tenants in common – One or more people own specified portions of the property. This can be split 50-50 or any other combination. In this scenario, each owner has their own share of the property and can sell it to others or leave to someone else in a Will.
- Trust ownership – The property is owned and managed by a trust or other entity that holds assets on behalf of beneficiaries. The most common type are family trusts, which are often in place when property is left to younger family members.
- Company ownership – You own property through a company. This approach may be beneficial if the owner’s tax rate is over 30% because the company will pay less tax.
Selling investment property when the time is right
So you’ve decided it’s a good time to sell your investment property. Great! Maybe the market is just right to make a strong return on your investment. Perhaps you’re looking to downsize your portfolio or move into a different kind of investment. Whatever the reason, here are the steps you need to take to get that investment property sold.
1. Ask ‘how much is my property worth?’
First, you need to find out what your investment property might sell for. You can speak to an agent and get real estate advice alongside your own property research. Make sure you get a few opinions and double-check any figures you’re given.
A great place to start is by getting a free online property value report from Upside. In under a minute, this handy report will give you access to information from Australia’s leading real estate data providers, covering insights such as a value estimate of your property, recent sale prices of homes in the area so you can see where your property sits on the market, as well as suburb demographic data.
If you can, go to auctions for similar properties, and see what they sell for, as well as how many people attend and bid. This is a great way to get a ballpark figure for what your place is worth and how sought after it might be.
2. Compare real estate agents to find the best
All this information is good to have when you eventually approach an agent – make sure their property appraisal is in line with the research you’ve done. It’s important to note here that it might be tempting to go with the agent that offers you the highest property appraisal estimate, but unless they can deliver, it’s just a number. That’s why it’s important to do your property market research carefully – particularly if your investment property is in a location you’re not familiar with.
The best way to decide on the right real estate agent for you is to contact a few different agents to try to get a feel for how they work. Be sure to research and ask any prospective agent the appropriate questions to make finding the right agent a lot easier.
3. Consider the tax repercussions
Since your property isn’t your main home, selling your investment property will attract Capital Gains Tax (CGT). If you’re not an Australian resident for tax purposes, you may also be liable for a Capital Gains Withholding cost equal to 12.5% of the value of the sale.
4. Decide on an auction or private treaty
With the help and advice of your agent, you also need to decide on whether you want to go for auction or a private sale. Both have their advantages, but it’ll depend on the property in question and the property market. If your property is in high demand, or unique in some way, the chances of it doing well at auction are increased.
5. Ensure your agent and tenants are in communication
Tenants must have 24 hours’ notice of an inspection, so it will be important for your agent to be aware of the legal requirements around selling a tenanted property. Discuss this with your agent ahead of time so no errors are made, as this could result in unhappy tenants and unhappy prospective buyers.
Should you sell a tenanted property?
If your investment property has tenants, you might be wondering whether it’s better to sell while tenanted or when vacant. There a several pros and cons to consider when selling a tenanted property:
- You’ll still receive rental income during the selling process
- Prospective buyers could be attracted to a property that is already tenanted
- Having a tenant living in the property assures investors that it has good potential
- You’ll need to give the tenant adequate notice before inspections
- Tenants may not present the property in its best light, which could negatively impact the sale price
- Tenants could be seen as an inconvenience for buyers who want to occupy the property on settlement
If you do decide to sell an investment property while tenanted, you must give adequate notice to your tenants. Check details of their tenancy agreement and the laws in your state to make sure you comply. After finding out that they have to move, your tenants may decide to leave sooner rather than later – some landlords will offer a reduced rent in exchange for the disruption of viewings and maintain a good relationship.
While it doesn’t have to be a deal-breaker to have people living in the house while you show prospective buyers, maintaining a good relationship with tenants is important to ensure the sales process is as smooth as possible.
When you’re selling your investment property, it’s important to maximise the return on your investment. One way to save is by going with a flat-fee agent – chat with us about how we can help.