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When should you sell your investment property?

By ,| 4 min read

Whether your investment property portfolio consists of one property or a dozen, it can be difficult to know when to sell these assets. You want your investment property to be an asset, rather than a burden on your finances. It’s not easy to know when to sell your rental property as the best time depends on your personal circumstances, the property market, and factors you don’t have a say over.

In this article, we’ll discuss some of the reasons investors sell, capital gains tax implications, and how long to wait to sell your property.

How long should you wait to sell an investment property?

The length of time that you should retain your investment property will depend on your investment goals. In general, if you’re set to make a profit upon selling, it’s wise to wait to sell an investment property until after at least 12 months of ownership. This way, you can cut your capital gains tax charge in half.

There are reasons that you might want to sell sooner, such as if you are losing money by holding onto the property. This might occur during times of property price drops, high vacancy rate periods, or just an underperforming market.

But if your goal is to earn passive income, and your rental property is helping you do that, you might want to keep hold of it.

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Do you have to pay capital gains tax when selling an investment property?

When you sell your property, you’ll either make a gain or a loss. If you sell your investment property for more than what you paid (i.e. making a profit), you’ve made a capital gain. In this case, your gain will likely be taxed. If you make a capital loss, you won’t have to pay capital gains tax (CGT) and the loss can be used to offset future capital gains.

Whether you make a capital gain or a loss, this must be reported in your income tax return as a part of your assessable income. CGT isn’t a separate tax, and is charged at your marginal income tax rate. CGT does not apply to owner-occupied properties, and there may be some exemptions for investors.

Most investors won’t be eligible for exemptions, but many qualify for a significant discount. If you hold the property for over 12 months, you get a 50% capital gains tax discount.

Why do investors sell their rental properties?

Here are some key reasons people sell their investment properties:

1. Access to cash

Selling your investment property is generally a great way to improve your cash flow. Maybe you need the money for something important in your life, or maybe you want to redirect the cash towards a better investment. Some investors will sell their property in order to buy a more substantial home that they intend to live in.

2. Underperforming property or market

Unfortunately, real estate investments can be risky and don’t always go to plan. You may find that your rental property is costing you a lot more money than it’s worth, and this could influence your decision to sell. Bear in mind that if your rental expenses are exceeding your rental income, your property is negatively geared. Negative gearing comes with tax deductions and benefits that make it a common investment strategy, especially when the losses may only be short term.

Investors also sell when they see that the potential for value growth is limited. Sometimes it’s better to get the property off your hands while sale prices are average, rather than low.

3. Strategic interest-only home loan investing

An interest-only home loan requires the borrower to just make repayments on the interest growing on top of the borrowed amount for a set period of time. This means that you don’t actually reduce the mortgage because you aren’t paying off the principal (loan amount).

This repayment option reduces the amount you pay each month and increases your cash flow, making it a popular option for investors looking to invest in other opportunities.

Some investors go about interest-only loans in a very strategic manner. They intentionally buy a property in a high-growth area that they intend to sell within a few years at a profit as the value increases. This strategy keeps their expenses low, but still enables them to profit off their investment. For this strategy to be successful, it’s important to have a thorough understanding of the market and when to sell.

Interest-only mortgages are risky, as you can’t guarantee that your property will increase in value and you will be hit with higher repayments once the interest-only period ends.

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Should I sell my investment property before retirement?

Selling an investment property can provide you with a good amount of capital for your retirement. It can help fund international or domestic travel, a new purchase, home renovations, as well as giving you a reassuring financial cushion. Plus, the property-selling experience can be exhausting and costly, so it can be nice to deal with it before you retire.

However, once you retire, you won’t be receiving the same kind of regular income you earned while you were employed, so your rental income may become more important to you. Bear in mind that selling an investment property after retirement can impact your Age Pension entitlements.

Are you selling your investment property? Lendi’s Home Loan Specialists can help with any investment home loan questions you might have at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: investing, investment, investment property, capital gains tax, interest only, interest only period, interest only repayments, negative gearing

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