A retirement take on selling properties

Summary: Selling investment properties can have major capital gains tax consequences, but these can become even more complex in the lead-up to retirement.

Key take-out: The tax payable on a gain is likely to be considerably higher for an individual selling while they are still working compared to when they retire.

Question: I am approaching 62, still working with an income of over $150,000 per annum, and I intend to work for at most another two years before retiring. I have quite a few investment properties, which have appreciated in value in excess of 50 per cent of the original purchase price.  

Should I sell my investment properties now when I am still working and pay capital gains tax at the higher tax bracket, or should I wait until my retirement before selling such properties? If I sell the properties now, I can boost my super balance, which is currently about $400,000. If I can afford it with my current investments, I would like to retire tomorrow. Would you suggest I offload one or two of my investment properties now or await my retirement?

Answer: From your question I get the impression that if you can afford to retire now, and there are some good reasons to do so, that would be your preference. It is interesting to see that you are looking at selling your investment properties, as all too often people regard their properties as a form of superannuation and want to pass these assets on to their children upon their death.

The problem with this approach is residential properties invariably produce a net rental return of less than 3 per cent per annum, and therefore by keeping the properties the income generated in retirement is not maximised and the capital gains tax problem is passed on to the children inheriting them.

From an income tax and maximising superannuation point of view it makes sense for you to be retiring sooner rather than later, and to sell your properties over the coming years until you turn 65.

You could sell the properties now while continuing to work but, as a result of your employment income, the tax payable on the gains severely erodes the benefit of selling the properties. If you sell the properties while you are still working, you run the risk of your taxable income exceeding the $250,000 limit, at which point the extra super contributions tax of 15 per cent is payable.

If you sold the properties while you are still working, one of the few tax planning strategies available would be to maximise your salary sacrifice contribution. If you sell the properties after having finished work, and before you turn 65, you could make a personal deductible superannuation contribution of $25,000 to reduce tax payable on any capital gains.

The table below shows the tax payable on making a $150,000 assessable capital gain while you are still working and salary sacrificing $10,000, compared to you being retired and having no taxable income as a result of receiving a tax-free pension from your superannuation fund.

The tax and Medicare levy payable on a $300,000 capital gain, which after the 50 per cent general CGT discount reduces to an assessable gain of $150,000, plus the tax payable on the salary sacrifice amount and the super surcharge tax of 15 per cent, comes to a total of $72,438.

Whereas, if you waited until you are retired with no taxable income, the total tax and Medicare levy payable on the gain, plus the contributions tax on the deductible $25,000 super contribution, would be $49,518.

In addition to the extra tax payable if you sell the properties while you are still working, there would be a further cost of having to pay back some of the private health insurance rebate. This is because your income would exceed the threshold, at which point the Commonwealth starts reducing the amount of rebate they pay for high income earners.

If your objective is to maximise your superannuation benefits by starting to sell the properties now, you will be maximising what you can contribute as non-concessional contributions before you turn 66.

Selling your properties now, while aged 63, the maximum you can make as non-concessional contributions would be $500,000. This is made up of the $100,000 over the next two years, with a $300,000 contribution in the year you turned 65.

Depending on the number of properties that you own, and the amount of income you will need to generate in retirement, your best strategy may be a combination of finishing work sooner and selling some properties after you have retired and are aged over 65. Due to the complexities of your situation, you should seek professional advice from a planner that specialises in strategic retirement tax planning.