Ask Paul: Is it time to sell our investment properties?

Hi Paul,

I'm 64 and my wife is 59.

We own our home, have two investment properties, which are rented out, plus a vacant block of land that I bought around 38 years ago as an investment, and we both have some superannuation. 

We have a small loan on one of the rental properties - about $300,000.

I am looking for advice about the best way to set ourselves up for retirement. Neither of us is working currently, having semi-retired. 

I am thinking of selling the vacant block of land to pay off the debt. My main concern is around the remaining two properties. 

Should I look to:
1. Sell the older of the two properties, which is 59 years old? The house is valued at about $1 million with a rental income of $620pw. Then we could put the proceeds into a savings/investment account and live off those plus the income from the other rental and super, or
2. Sell both remaining properties and live off the proceeds and super? The second property is a duplex valued at $850k, with a rental income of $960pw, or
3. Consider another option?

I would also appreciate your advice on how to minimise capital gains tax (CGT). - Jim

Jim, you have built a very good asset base with your home, two investment properties, vacant land and some super.

Property has been an excellent investment. This is hardly a surprise when we look at population growth. When I was born in 1955, the population was some 9.2 million. Today it is approaching 27 million.

The pressure on property prices would be nowhere near as significant if a greater percentage of our land mass was appropriate for large towns and cities. The reality is we cluster around our coastline and inland areas with productive land and reasonable rainfall.

Property is a simple asset; in that it is driven by supply and demand.

We have a limited supply of land with the infrastructure needed for modern life: schools, hospitals, entertainment, restaurants and cafes. Add a near tripling of our population over the past 70 years to a scarce supply of land and the obvious happens. We are one of the world's most expensive countries to buy a home.

Australia's favourite asset

This, plus tax breaks, has made property Australia's favourite asset. Our tax system favours growth assets over income-producing assets. With property, the name of the game is capital growth. On income we earn, tax, including the Medicare levy, is payable at nearly 50% for high-income earners.

But with investment property, we get to deduct our expenses including interest, and we get depreciation allowances.

Then, whenever we sell, we get a 50% tax discount on any profits we make. On our family home, there is no tax on its sale or, unlike other countries, death duties when we die.

Property is blessed with tax breaks, great for us Baby Boomers, but the tax system favours us and makes home ownership hard for the generations that follow.

Property and other growth assets, such as shares, are ideal for wealth creators.

But for retirees, property can be a bit of a dud.

Vacant land

Let's look at your vacant land. If it is well located, I am sure it has grown in value. But it does not send you a cent of income. In fact, it costs you money to hold it.

Vacant land is a great way of making our grandkids rich. We hold it for decades, pay rates and maintain the land, with the next generations often the beneficiaries.

I agree with you. I'd be looking at selling the vacant land, pay the discounted CGT, pay off your debts and invest where you get better income returns.

I do not know where you hold your property and its growth potential, but the 59-year-old house does not look like a great retirement asset to me.

The rent is about $32,000. Take out all your costs, rates, possibly land tax, insurance and the maintenance that comes with an old property and you'd be lucky to be earning much more than 2% in income. I'd be considering selling that and buying more appropriate retirement assets.

The duplex sounds better to me. Rent is a handy $50,000 or so, and with a duplex, expenses must be lower, and the income return on the $850,000 valuation is pretty good. Maybe that is a keeper? It would generate inflation-linked income and its value should keep pace with inflation.

Another problem with property is its relative illiquidity. Unlike shares, where you can select a portfolio generating a solid income stream with tax advantages from franked dividends, and sell a small part of your portfolio, a property is an 'all in' investment. You own all of it or none of it!

However, if you do decide to sell the vacant land and the old house, you would not only earn more income, but have good access to parts of your capital if required. I would think that holding the property that has better yields could be good diversification and provide decent returns.

Planning is necessary

I agree planning CGT is very important.

But this you must do with your adviser or accountant. I do not have all the details that are critical to this decision, such as: whose name each property is held in; what your tax rates are now and into the future; and whether you have any capital losses.

I can make general points, such as that it probably makes sense to spread sales over a few financial years, so you don't get a significant slab of CGT profits being added to your income in any one year. But this is a critical issue for you both.

Tax planning around any sales you make requires a meeting with your tax adviser to determine the best strategy. I'd also be having a careful look at whether you can top up your super with any sale proceeds.

Super is a fabulous retirement asset. You only pay low rates of tax inside super. If you opt for a pension, subject to restrictions around how much you have in super, your earnings may be tax free.

In retirement as a 64-year-old you can take money out tax free, with your wife at age 59, not far away from that. So, while planning to minimise CGT, chat to your adviser about how you may be able to add to super with cash you free up.

You and your wife have built an excellent pool of assets. Now is the time to capitalise on this, but before you do anything, talk to an adviser with skills in tax and super. Planning will cost you money in professional fees, but the benefits will be very high.

I do hope that you enjoy the rewards from the years of work you and your wife have put into building up such a good pool of assets.

Remember, there is no point being the richest person in the graveyard.

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