2022 Guide: Selling an Investment Property

August 2, 2022
Selling an Investment Property

Thinking of selling an investment property you purchased? There are a few things to consider—taxes, the ownership structure and whether it’s the right time are some of them. Of course, you want to ensure you’re making a profit too!

But don’t worry, we’re breaking down all the factors you need to consider before making the decision to sell your investment property. From researching the property market to making the sale.

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How do I know it’s the right time to sell my investment property?

There are many answers to the question “should I sell my investment property”. Many long-term investors will tell you that the longer you hold onto an investment, the better the chance of capital gains when you do sell.

However, you must consider what the investment property is costing you. And how has your financial situation evolved over the course of owning this property?

If you’re in need of more capital, it could be worthwhile to sell the property and invest your capital somewhere else.

Better yet, if it’s the right time in the market, the money you make from selling your investment property can be put towards real estate with even more growth potential.

So if you’re thinking “should I sell my investment property?”, here are a few questions to ask yourself to get an answer.

What is my retirement plan?

selling an investment property

Many investment property owners keep their investment properties to secure capital for retirement. So if you haven’t thought of a retirement plan for yourself, it might be a good idea to save the real estate for this.

You can even start dreaming about the best places to retire in Australia. Just remember, if you sell an investment property after retiring, it might impact your Age Pension entitlements.

How are my returns doing?

This may seem obvious to some, but if your return on investment isn’t satisfactory, you might want to cut your losses and invest your capital in something else.

Is there a better investment out there?

If another investment has caught your attention, it can be a good reason to sell your investment to reinvest elsewhere.

Does my current situation allow me to avoid capital gains tax?

Legally, you have to be living in your investment property for more than a year over a six-year period to avoid capital gains tax (CGT). So if this sounds like you, then you can cut out those taxes. Anything past six years means you’re liable for taxes.

Should I wait before selling my investment property?

selling an investment property

While there may be solid reasons to sell your investment properties, there might also be reasons to hold onto it.

Your investment property is a recent purchase

If you bought the property less than five years ago, you could still be at a loss. When you bought the property, you paid for a lot of things—conveyancing fees, stamp duty… it can take a while to break even with these, especially if you’re taking on the costs of selling (second round of conveyancing, agent fees).

Your property is performing well

This is kind of a no-brainer, but if the property is offering solid rental yield and is positively geared, selling can wait.

Your property has growth potential

Real estate investment is a long-term strategy. Sometimes, you have to wait it out to see returns. So if your property has strong growth potential, holding onto it might offer more benefits in the long run.

Taxes are beneficial to your situation

Tax deductions can come into place when you hold onto investment properties for longer. Make sure you’re doing your due diligence and looking into these potential benefits.

How much tax do you pay if you sell an investment property?

If you’re selling a property you don’t live in, in other words, an investment property, you usually have to pay Capital Gains Tax (CGT) when you sell.

Capital gains tax is a tax on the profits you’re making from the sale of this asset, like an investment property. You can calculate yourself what the CGT would look like.

CGT is calculated by taking the profit you make from the sale minus the purchase price you paid for the property as well as its maintenance and selling costs. When you file your taxes at the end of the financial year, the profits will be included in your assessable income declaration.

How do I avoid capital gains tax on investment property?

selling an investment property

This is a question many ask when selling an investment property and fortunately, there are ways to avoid paying cgt when you sell. Here are a few situations:

You live in your investment property – if the investment property has become your principal residence, you have partial exemption from CGT.

The temporary absence rule – if you’ve only temporarily rented out the home and have otherwise been living in it for over 12 months in the past six years, you may get a capital gains tax exemption.

Your investment property qualifies as affordable housing – you’re eligible for a 10% discount on capital gains tax if the investment qualifies as affordable housing.

The property was purchased before 1985 – your property isn’t liable for CGT if if was purchased before 20 September 1985.

You made a loss on the sale – if there was a loss on the sale of the property, you can use that to minimise the taxes on other capital gains that year.

Why you should sell only part of an investment property

Depending on the type of property you invested in, another option is to sell off only a part of the property. By transferring only part of the property to other parties, you can reap the following benefits:

  • Less capital gains tax
  • More immediate capital that can be reinvested
  • You can still reap returns on the investment

If you’re considering selling off just a portion of the property, do seek professional advice from a specialised lawyer to get advice on the most effective way to split it.

Types of property ownership structures

  • Sole ownership – You are the only owner of the property. You are entirely responsible for the property and yours is the only name on the deed.
  • Tenancy in common – The property is owned by one or more people in defined portions. Sometimes split equally and other times not. Each person has a right to their share and can sell their part or leave it to someone else in their will.
  • Joint tenant – The property is owned by two people equally so together you have full ownership of the property. This is common in marriages. However, you can’t sell your half of the property or leave it to someone in your will.
  • Trust ownership – A trust or entity own the property on behalf of specified beneficiaries. This is common amongst families who leave properties to younger family members.
  • Company ownership – Your company is legally owned by a company. Some people choose to do this if the original tax rate of the owner is over 30% because the company’s tax rate would be lower.

When should you sell an investment property?

selling an investment property

When you’re selling an investment property, you want to know it’s the right time. Is the market value up enough to get a good return? Do you want to try out a different sort of investment?

Either way, if you think it’s the right time to sell, here are a few things to think about first:

1. What is the current value of my property?

Before you decide to sell, you should know how much your property is worth. As we learned in our article on how to estimate home value, it’s important to seek professional advice.

A real estate agent is a good person to start with, but you can also consult different experts to see what the consensus is. Some might even offer a free property appraisal.

Look at other comparable properties and see what they sell for. Auctions are a good place to do this. You can attend them and assess what the interest and sale price look like.

2. Find the right real estate agent

While you’re finding out how much the property is worth by consulting with real estate agents, use your time with them to find which agent you work best with.

The agents might estimate different price points for you, but don’t simply be tempted by the highest appraisal number. You want to prioritise an agent you trust and who’s knowledgable. Meet with different agents to see how they work.

Look at their sale history and check out their testimonials. When you meet with them, prepare important questions that will help you decide if they’re the right real estate agent to work with.

But take it a step further and do your own research to get familiarised with the market and your neighbourhood. It always helps to understand the property climate before taking someone else’s advice.

3. Understand the tax implications

If you’re selling an investment property which isn’t your main residence, you’re liable to pay capital gains tax. When it comes to non-Australian property owners, you may be responsible for paying Capital Gains Withholding which is about 12.5% of the sale price. So the tax repercussions are notable.

4. Choose between a private treaty or auction

Your agent can help you decide how best to move forward with the sale process. Both auctions and private sales have their own benefits and disadvantages that will depend on your situation and your property.

If your property is special in some way or in high demand, an auction could get you a good sale price.

5. Get your agent to liaise with your tenant

Once you’ve chosen the real estate agent you want to work with, they will also be in charge of letting your tenants know about the potential sale. Tenants also need 24 hours’ notice before an inspection.

Both you and your agent should be aware of the particularities when it comes to selling a tenanted property. Either way, letting your tenants know ahead of time can prevent any issues.

Selling a tenanted property

selling an investment property

If you’ve rented out your investment property, you may be wondering whether to wait until it’s been vacated or to sell it tenanted. So let’s go through the pros and cons of selling your tenanted rental property.

Pros of selling a tenanted property:

  • You can still get rental income during the sale process.
  • Prospective buyers, especially real estate investors, will prefer an already tenanted property.
  • The fact that your property is already tenanted will show buyers the demand for your property and could raise the asking price.

Cons of selling a tenanted property:

  • Tenants will need notice before inspections.
  • Messy or disorderly tenants may make the property look less favourable and lower the sale price.
  • If buyers want to live in the property, it may dissuade them from buying an already tenanted property.

Just remember to give notice to your tenants ahead of time if you do decide to sell your property tenanted.

Read over the tenancy agreement again and check out the state laws to ensure you’re respecting the notice period etc.

Sometimes, when tenants learn that the property is being put on the market, they might wish to vacate earlier. If this happens and you want them to stay, you can offer them a reduced rent to make up for the inspections.

Having a good relationship with your tenants can really make the sale process smoother. From being cordial about inspections to tidying up the property, the more cooperative your tenants, the better.

Selling an investment property – a checklist

Selling a house takes time and effort so do enlist the help of an experienced agent for this. You will also need a conveyancer or solicitor for the legal stuff.

To aid in the organisation, we’ve put together a checklist for selling the investment property so you’re on top of everything.

  • Give notice to your tenants about your intention to sell.
  • Schedule the tidying up of the property for photos and inspections.
  • Study the market and shop around for a free property report.
  • Find an agent to get an appraisal, begin the sale process, choose a method of sale (private sale or auction) and finalise a marketing plan.
  • Speak to a conveyancer or solicitor to arrange the legal process.
  • Hold inspections and open houses.
  • Discuss any offers with the agent and hopefully accept one.
  • Finalise the settlement date.
  • Remind the buyer about when the tenants will vacate as they must legally let them stay. Or if the tenants are to vacate, give them at least 30-90 days’ notice.
  • Continue to oversee process and paperwork with agent and conveyancer.
  • Finalise payment.
  • Pack and clean out property, close out utilities connected to property.
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