Record real estate price rises in Manly, Seaforth, Mosman and the broader Northern Beaches in recent years leave investors with substantial increases in equity in their properties. This has been enhanced by a long period of record low interest rates, soon to come to an end.We have found that many clients have taken the opportunity to sell investment properties they have held for a long time. They are using the funds to pay off debts, optimise their superannuation contributions, help out their kids and a myriad of other things. We find there are several reasons people are doing this.
Transferring wealth from investment properties to the superannuation environment often shifts wealth from a fully taxed environment to a lower taxed environment. While your superannuation remains in accumulation phase, tax of 15% is payable on earnings or an effective rate of 10% on any capital gains realised for assets held for more than 12 months
Once you transfer your superannuation benefit into the full pension phase, any earnings will be tax free provided the account balance at the pension commencement date is below $1.7m. Above the $1.7m cap the 15% and 10% rates mentioned above apply. Still substantially better than higher marginal tax rates. For a couple the cap doubles to $3.4m.
Holding investment properties can be time consuming. It takes time to find good tenants, keep up repairs and maintenance on the property, garden maintenance, body corporate issues, strata levies etc. Over time properties need upgrades or improvements. This can involve special levies or substantial capital outlays. Even when an agent handles this for you it can still be time consuming and costly.
Record Property Prices and turning interest rates
According to Domain property prices over the year to 31 Oct 2021 rose 37.2% in Manly and 33.3% in Seaforth. It’s a similar story in Mosman, Clontarf and all over the Northern Beaches. Prices have risen across Sydney since the inception of COVID. Investors know it is best to sell in a hot market and with interest rates on the rise and prices expected to cool many are acting now.
Low rental returns and lack of liquidity
Investors may have enjoyed substantial increases in the value of their properties, but rental returns are typically low. There are substantial ongoing costs in holding an investment property. Costs such as rates, repairs, strata levies, maintenance, agent’s fees, letting fees, land tax etc. It is not uncommon for net rental return after costs to be less than 2% before income tax. Often these returns are unsuited to provide income to people in retirement. The term ‘Asset Rich – Cash Flow Poor’ is often used for those with too much property and not enough diversity in their portfolios. This situation can be exacerbated by lack of liquidity. Property is an illiquid asset. It takes a lot of time to buy and sell and you can’t sell the lounge room to pay for a holiday or a new car.
Loss of Tax benefits over time
Investment properties can be a great way to enhance your wealth. Often the benefit can be enhanced through negative gearing. We find that over time most investors end up positively geared or with no debt at all. The initial tax benefits are no longer available.
These days it is not uncommon for clients to have maxed out their superannuation contribution entitlements. They can’t contribute any more significant amounts to super if at all. This can sometimes be managed over time depending on a number of factors, including age and work status. However, there are situations where it is not in the client’s best interest to accumulate further funds into the superannuation environment, or it is no longer possible to contribute. In these cases, Family Trusts are often a good alternative. They provide a level of asset protection, are good for tax planning and income splitting and are also useful as intergenerational investment vehicles. We have noticed an increase in clients requiring family trust set ups to invest their additional funds.
Financial Planning and Wealth Advisory services are provided by Condell Wealth Advisers Pty Ltd, a privately owned holder of an Australian Financial Services Licence No: 498434.
Accounting, Taxation and Business Advisory services are provided by Condell Accountants Pty Ltd, a full-service accounting practice.
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.
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