Examining your investment property portfolio before retirement can yield substantial tax savings and alleviate potential complications. Moreover, timing the divestment of your investment property prior to retirement could amplify these benefits, especially with the impending increase in superannuation contribution caps, the first in three years.
While owning an investment property may be integral to your wealth accumulation strategy, it’s prudent to reassess its long-term viability and alignment with your retirement income objectives. Rental yields alone often fall short of covering retirement expenses, necessitating a thorough evaluation. Considerations include:
- Rental Income Reliability: A vacant property means no income stream.
- Limited Liquidity: Unlike other assets, selling a portion of a property isn’t feasible.
- Slow Transaction Process: Property sales are typically protracted and illiquid.
- Tax Implications: Reduced tax benefits post-retirement due to lower taxable income, alongside capital gains tax considerations.
Many individuals plan to sell investment properties post-retirement to mitigate tax implications, leveraging the absence of employment income that places them in higher tax brackets.
An effective strategy worth exploring is leveraging “carry-forward” concessional contributions to superannuation. With the upcoming rise in super contribution limits effective from July 1, this avenue becomes even more appealing.
Key super contribution strategies include:
Concessional Contributions: These pre-tax contributions augment retirement savings, encompassing employer contributions, salary-sacrifice contributions, and tax-deductible personal contributions.
- The concessional contributions cap for 2023-24 is $27,500, set to increase to $30,000 from July 1, 2024.
- Unused concessional amounts can be carried forward for up to five years.
Important considerations:
Concessional contributions incur a 15% tax upon entry into the super fund.
Carry-forward contributions eligibility requires a total super balance below $500,000.
Non-Concessional Contributions: These post-tax contributions offer flexibility.
- The current non-concessional limit is $110,000 per financial year, rising to $120,000 from July 1, 2024.
- A bring-forward provision permits contributions of up to $360,000 over three years, subject to eligibility criteria.
- Notably, non-concessional contributions enter super without deductions for contributions tax.
Case Study
Max and Heather, both in their early 60s, opt to sell their jointly-owned investment property, realising a substantial capital gain. Leveraging concessional and non-concessional contributions, they strategically manage their tax liabilities. By aligning property sales with super contributions, they optimize tax efficiencies and bolster retirement savings.
Ultimately, this proactive approach not only minimizes tax burdens but also maximizes the inflow of funds into tax-advantaged superannuation accounts, laying a solid foundation for a financially secure retirement.
