Selling a property often results in a huge cash infusion, which if managed well can be a great accelerator to your wealth creation.
With the property, given the size of the numbers, the difference between getting it right and just doing it can be huge, so taking the smarter steps will pay big dividends here.
In Australia, the long-term growth rate of property over the last 150 years has been 6.3 per cent according to Westpac data. This means that the average property in Australia has doubled in value every 11 years.
If you had bought an “average” property in Sydney in 2011, when the median home price was $634,000, based on the average property growth rate of 6.3%, you could sell that property today for $1,265,517, which would give you a net profit of $631,517.
This is a large chunk of change in anyone’s book, and a sum of money that can go a long way toward establishing your future financial plans.
But what happens after you sell is crucial.
Assuming the property is an investment, you will unfortunately have to pay some taxes. On the one hand, this is good because it means that you have made money on your investment.
But you don’t want to pay more than you owe: the more taxes you can save, the more money you’ll have to spend on your other goals.
retirement is your friend
Super is an important part of everyone’s wealth, but the tax breaks available through Super make it a perfect tool to help you lower your tax bill when you sell property.
Let me illustrate with an example.
A couple earning the average Australian income of $90,916 would each pay tax on that income of $21,863.
Assuming they bought an ‘average’ investment property in 2011 for $634,000 and sold it today for $1,265,517, the total gain would be $631,517.
Because you have held the investment for more than 12 months, a 50 percent discount is applied to your capital gain to reduce it to $315,758.
Assuming the property is held in joint name, we divide the gain back into a total taxable capital gain of $157,879 per person.
This amount would then be added to your other income of $90,916, bringing your ATO taxable income to $248,795. The total tax per person would be $87,631 or $175,262 in total taxes for the couple.
You would still end up with a solid amount of money after paying your taxes, and most people would be happy with this as a result. But it could be so much better…
Every taxpayer has the possibility of making tax-deductible contributions to the supermarket. These contributions reduce your ATO taxable income and therefore the amount of tax you pay.
If you earn $90,916, your employer would be making mandatory top-guarantee contributions of $9,456. But the limit for extraordinary concessional contributions is $27,500, which means you have room to make another $18,044 in tax-deductible contributions in the current tax year. .
For our couple, contributing at this level would reduce their taxable income to $230,751 and mean their personal tax bill would be $79,150, a reduction of $8,481 per person or $16,692 combined.
But it can be even better…
A few years ago, the government introduced super contributions to “catch up.” If you have less than $500,000 in your superfund and have not contributed up to your full concessional contribution limit in financial years since tax year 2019, you can “catch up” these contributions in the current tax year.
This means that for someone who has been receiving extraordinary contributions of $9,456 each year for the last five financial years, the total ‘unused’ contributions would be $82,720.
(For engineers still at home, the limit was increased from $25,000 to $27,500 in fiscal year 2021/22, which makes the calculation a bit more complicated.)
Going back to our couple, if each of them contributed $82,720 to their superfund funds in the current tax year, the total tax due would be reduced to $49,866 per person, or $99,732 combined.
Comparing this to our starting tax position of $175,262, this reflects a total personal tax savings of $75,530 for our couple. A lot of extra money can be put toward wealth-building or other money goals, and it highlights the difference between “good” and “great” when it comes to your planning.
Selling a property is a big deal and something that can quickly accelerate the rate of progress of your money, but optimizing your strategy makes a big difference. If you want to do the smartest moves, it’s important that you do them right.
The rules are complicated and can be confusing, and there are a number of important considerations that I haven’t covered in detail here. If you go down this road, make sure your plan is rock solid and consider getting some good professional advice to make the most of the opportunity.
Ben Nash is a financial commentator, podcast host, financial advisor, and founder of Pivot Wealth, and the author of the Amazon bestselling book ‘Get Unstuck: Your guide to created a life not limited by money.’
Ben just launched a series of free online financial education events to help you take financial initiative. You can check all the details and reserve your place here.
Disclaimer: The information in this article is general in nature and does not take into account your personal goals, financial situation, or needs. Therefore, you should consider whether the information is appropriate for your circumstances before acting on it and, where appropriate, seek professional advice from a financial professional.