Dilemma to sell an investment property before retirement

Starting from a low base point financially 18 years ago, we have worked hard to get ahead. Ideally, we would like to fully retire in October 2019 when I will be nearly 63 and my husband will be 68. I will have $300,000 in superannuation and my husband $90,000, both accounts in First State Super’s Conservative Growth fund; $40,000 in cash; an investment townhouse worth $850,000 and we own our townhouse worth $950,000. The properties are well located, a block from the beach at Umina Beach, NSW. Upon retirement and further to reviewing information, we feel we are looking at spending about $70,000 per year for the first 10 years, at least. Is it a sound financial move to sell the investment property before we stop work in October 2019 and what do we do with the money from the sale? The investment property was purchased in 2011 and rented until 2015, before we lived in it until 2017 while we renovated the back townhouse and moved into it. We have left the property vacant for storage as we prefer not to share our space whilst we are earning money. Alternatively, if we keep the property and rent it out when we retire, the net return for rental would be a conservative $500 a week. If we go with this option to top up our retirement income to $70,000 a year, we would need to draw on our super until I reach retirement age of 66 and 6 months; or transition out of work over a couple more years with part time/casual work. Getting the pension certainly isn’t our priority, but when we are both of pension age, we would like to access any benefits. S.B.

The reader has two townhouses, a block back from Umina Beach.

The reader has two townhouses, a block back from Umina Beach.

To sell or not to sell a property is a tougher than usual question in the current climate of falling prices. If the property market had been through a “normal” growth spurt (if there is such a thing), it would be a simple proposition of holding onto it until the market picked up again. But we have just been through a monster of a boom.

As a rule of thumb, the longer and higher a boom in any market, the longer and further the subsequent hangover. So if you feel forced to sell, it might be better to do so while we are still near the top of the market.

However, as a rule, I prefer to hold onto an unencumbered property in good condition and in a good location for as long as possible. Assuming a net $25,000 a year in rent, you would need to top it up with some $45,000 from your super in retirement. Your current assets would thus last you about nine years, so I suggest your best strategy would be to hire a bin, clear out your investment property and rent it soon, thus allowing you to build up your savings as much as possible while working, possibly for longer than planned.

If you can both place the maximum $25,000 concessional contributions into super for two or more years, your savings should rise well above $500,000 and last a dozen years or so, which would hopefully see through any downturn in property prices.

Given that the age pension cuts out for assets above $844,000, you can hope that you will be too wealthy to claim one for many years yet. But property is not subject to deeming, unlike a super pension, and you should be able to claim a Commonwealth Seniors Health Card.

We are currently contemplating transferring our allocated pension account to another fund, but we want to be sure that such a transfer is not going to incur any significant financial penalty, in particular tax. I have contacted our proposed fund and received details of how we would effect such a transfer and what fees may be incurred, but the response did not specifically address whether any additional tax would be incurred, probably my own fault in not specifically asking that question. Can you advise whether there would be any further tax payable when transferring funds from one superannuation fund to another. P.N.

No. Rollovers from one allocated pension to another do not incur any tax. Check to see if there is an exit fee with your current fund.

I own a one-bedroom apartment in a large building in Randwick, NSW. Last year, strata decided that the building needed extensive repairs and renovations at a cost of $50,000 to me. Last financial year I made a profit of $10,000 on the rental return. This year I will make a $40,000 loss. Please tell me if I can spread the loss (or cost of repairs) over five years for taxation – and how? E.N.

You ask a complex question. Some of your expenses may be claimed against income this financial year and such income losses can be carried forward indefinitely to be offset against other future income.

These include the costs in “repairing” and “maintaining” the property. “Repairs” mean work to “make good or remedy defects in, damage to or deterioration” of the property. For example, replacing part of the guttering or windows damaged in a storm, or electrical appliances. “Maintenance” means work to prevent decay or fix existing deterioration. For example, painting or cleaning.

However, you cannot claim a deduction for “improvements”, such as remodelling a bathroom or replacing a facade, i.e. installing something new that changes the character of the item and is not just a restoration e.g. replacing a damaged gyprock wall with a brick wall. This is classified as “capital works” or “construction expenditure”. Such expenses on residential rental properties, along with fees for architects, engineers, surveyors, building permits, etc, can be depreciated at 2.5 per cent a year over 40 years, assuming you bought it after 1985, and began the structural works after 1992, given that the rate of capital works deductions varies with the type of construction and the date work was begun.

Basically, capital expenses increase your CGT cost base while capital works deductions reduce it. Be sure to talk to a tax accountant, there’s a lot of money involved.

Addendum: A reader transferred a UK pension in October 2014 to an Australian “Qualifying Recognised Overseas Pension Scheme” or QROPS. In 2015, the UK introduced a law effectively levying a 55pc tax if these amounts are transferred out of the QROPS within five full financial years. In a letter published August 29, I advised the reader to check if 2014 transfers are caught by the 2015 law (published information didn’t cover the question). A UK adviser, who has read the legislation, called (and yes, the paper is obviously read in London!) to say “Earlier transfers ARE caught by the change in law”, which will be of interest to other UK expats in a similar situation. In this case, five full UK financial years will not be up until April 5, 2020. I also mentioned that QROPS-related advice is often expensive and this is backed up by a recent penalty levied by the US government on an international advice firm. Google “SEC $8 million fine over QROPS advice”.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00. All letters answered.

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