Sell vs 'never' selling

[ChrisA1]

I read a post from Todd Hunter on the online YIP about selling to release equity and cash and releasing equity through refinancing (and hence never selling, or not selling for a long time) - www.yourinvestmentpropertymag.com.a...er/the-old-myth--property-forever-199347.aspx

This got me thinking about thoughts and comments on SS about selling vs 'never' selling (never is in inverted commas here because I assume that all investors will sell at some stage but some turn properties over much faster than others).

I'm interested in your comments about Todd's article and whether you're someone who keeps your properties for an extended period (say over 10 years) and withdraws equity to go again or whether you turn properties over at market highs to buy again.

A point made in the article is about prices falling after you have withdrawn equity, hence holding an asset that is valued at less than you have a loan for.


Cheers,

 

[Terry_w]

I advocate selling to clients where appropriate. e.g.

1. to restructure for asset purposes
2. to pay down non deductible debt and regear
3. before death where will likely to be challenged
4. where loans have been set up incorrectly with severe results
5. retirement strategy
6. spousal sale
7. sale to a trust

In all cases you just have to work out what the costs of selling are and consider carefully.

 

[hugh72]

There are valid reasons for selling, one is approaching retirement whenever that may be also if you realize that a purchase is a dud costing you money and has lost value over a extended period etc it might be wise to sell. Generally though time tends to be kind on your mistakes and long term is when compounding really does its thing. No one knows what is likely to happen short term and transaction costs in terms of stamp duty and agents fees are so high that I prefer to never sell and use equity for future purchases, historically rents have continued to rise long term with occasional drops when supply increases or interest rates decrease. Holding assets gets much easier with time but it may depend on your timeframe and overall plans

 

[WattleIdo]

Good to get a range of views. Selling will happen one day! Interesting to read the counter view to borrowing against equity. Not ready to sell yet but preparing for it.

 

[ChrisA1]

Steve McKnight is someone who recommends selling to release equity as the transaction (hopefully profit!) shows on that year's tax statement, which is then assessed as part of the documentation for a new loan. He explains that unless you are a very high income earner, at some point the cash flow from rents and incomes will not cover total debt position (i.e. serviceability wall) where selling a property may overcome this hurdle.

I like the comments in the article where the sale of a property must provide sufficient funds for 2 more purchases (hence growing the asset pool) - always a sign of a well performing asset!

 

[Terry_w]

Steve McKnight is someone who recommends selling to release equity as the transaction (hopefully profit!) shows on that year's tax statement, which is then assessed as part of the documentation for a new loan. He explains that unless you are a very high income earner, at some point the cash flow from rents and incomes will not cover total debt position (i.e. serviceability wall) where selling a property may overcome this hurdle.

I like the comments in the article where the sale of a property must provide sufficient funds for 2 more purchases (hence growing the asset pool) - always a sign of a well performing asset!

Income from capital gains is generally not counted as income for serviceability purposes as it is considered a one off transaction. However if you are doing it multiple times in a business like manner it could be = but then it would be taxed as income and not capital gains/

 

[Shahin_Afarin]

I went through a cycle of selling certain types of inventory (units) and converting them into development funds or sites.

I can also get 90% no LMI so there is not a huge need for me to sell stock in order to maximise the funds available. Unless of course I get a crappy valuation......

 

[datto]

Selling can be very expensive eg CGT legals etc etc.

Depends on your plan. Say you sell and it costs you 100K in taxes etc but that released equity will earn you 1 million in say 5 years then selling may be worthwhile. Of course I know there are other ways of releasing equity without selling.

There are many ways to skin a cat.

 

[ellejay]

I'm planning to hold for about five years and then sell two ips every five years until they're all gone. Might as well spend the money while we can enjoy it, that's the plan.

 

[datto]

It's great to sell down and spend the money but I wouldn't spend it all. I'd squirrel a portion away in another investment. Call me nuts but i'd regret going hungry in winter lol.

 

[RetireRich101]

does anyone have a general guide (in %) how much CGT to pay in a typical scenario?

Property purchased $400k in 2005
In 2015 the property was sold for $800K
just normal buy and hold with general maintenance expense on the way
Assuming buying expenses were 5%
Selling expenses were 2%
Total depreciation schedule were $10k per year.
Owner Salary bracket range 80-150K, so marginal is 37%

I take a punt
Profit is $400K
buying and selling expenses $36K
Depreciation. I think we only take building depreciation, say 10 x $3k = $30K
So nett profit is 400K + 30K - 36K = 394K
50% discount for investment kept more than 12m
18.5% x 394K = 73K tax payable

This works out to be 18%, so in effect is similar to your discount marginal tax rate

Does this sound about right?
If you kept the property for 2 ,5 or 20 years I would think the tax payable be your discounted marginal rate..

just trying to find a general rule of thumb to work our CGT payable

 

[ellejay]

It's great to sell down and spend the money but I wouldn't spend it all. I'd squirrel a portion away in another investment. Call me nuts but i'd regret going hungry in winter lol.

We'd be in our 80's by the time we'd sold them all up. We'd also have pretty good super so if that doesn't cover it then we're spending too much on stuff.

 

[Terry_w]

does anyone have a general guide (in %) how much CGT to pay in a typical scenario?

Property purchased $400k in 2005
In 2015 the property was sold for $800K
just normal buy and hold with general maintenance expense on the way
Assuming buying expenses were 5%
Selling expenses were 2%
Total depreciation schedule were $10k per year.
Owner Salary bracket range 80-150K, so marginal is 37%

I take a punt
Profit is $400K
buying and selling expenses $36K
Depreciation. I think we only take building depreciation, say 10 x $3k = $30K
So nett profit is 400K + 30K - 36K = 394K
50% discount for investment kept more than 12m
18.5% x 394K = 73K tax payable

This works out to be 18%, so in effect is similar to your discount marginal tax rate

Does this sound about right?
If you kept the property for 2 ,5 or 20 years I would think the tax payable be your discounted marginal rate..

just trying to find a general rule of thumb to work our CGT payable

Yes.

Just think if the 50% discount applies then the max CGT would be half the top tax rate. About 22.5% max.

 

[Jess Peletier]

I'm looking at selling a property that has served it's purpose. We bought a 60's house to subdivide and build on the front, and now that we've done that the back house is more of a liability than an asset.

 

[hugh72]

Sometimes properties rented for a long period can become very unloved, tired and need some serious work this may also be a reason for selling slightly earlier but once you have held an asset for >15-20 years that's when you really see the big multiple returns on the initial investment. The land value alone can be worth several times the initial house and land cost.

 

[GreyGhost]

I went through a cycle of selling certain types of inventory (units) and converting them into development funds or sites.

I can also get 90% no LMI so there is not a huge need for me to sell stock in order to maximise the funds available. Unless of course I get a crappy valuation......

What lender are you going through and what criteria are you fulfilling to get 90% no LMI?

I got the same deal with BOQ specialist as a chartered accountant 90% no LMI.
Would be good to know if there are other options avaliable.
Cheers

 

[datto]

We'd be in our 80's by the time we'd sold them all up. We'd also have pretty good super so if that doesn't cover it then we're spending too much on stuff.

That's different. You're laughing.

 

[NPB]

i voted sell to release equity.

Used to be in the never sell category but have changed my mind on that.

Not always to release equity , a good reason to sell if if you don't believe the property will perform in the next 3-6 years. High holding costs with no expected growth, why not cash out even if not much equity would be released.

I have had several properties i bought that doubled in value in the first 2-3 years and in hindsight should have sold all of those or at least some of them and put the cash into other areas of business or capital city high quality property.

I could have sold properties that peaked in 2010-2011 and bought up far more in Sydney than I did, that was one of the most obvious booms approaching of all time and in the biggest city in the country, should have sold out of some of those others and not worried about CGT etc.

Live and learn

 

[MTR]

NPB
Agree with your comments, take profits off the table and jump into another rising market. You will reach the end goal in shorter time frame and less risk IMO.

MTR

 

[CHAOS]

I went through a cycle of selling certain types of inventory (units) and converting them into development funds or sites.

I can also get 90% no LMI so there is not a huge need for me to sell stock in order to maximise the funds available. Unless of course I get a crappy valuation......

Hi Shahin - curious - how do you get 90% no LMI? Is that a perk of being a mortgage broker?