Are you an investor who has decided it is time to sell your rental property? Or are you a tenant residing in a property that is on the market? No matter your situation, it is important to know your rights during the sale process. Ensuring that the entire sale process runs smoothly and no parties are upset or adversely affected is extremely important. Here are a few things you need to consider when selling your investment property, or even living in a property that is on the market.
Firstly, it is important to assess why you are selling the property and to thoroughly weigh up your options. Ask yourself the following questions:
- Do you need the money? – Is the cost of owning an investment property impacting on your life/lifestyle?
- Is the property performing poorly? – Are there issues preventing your property from growing in value? Are they easy fixes, or do they require too much money and effort to overcome?
- Can you capitalise on the property? – Can further equity be manufactured before you list the property for sale? If so, can you keep these renovations/changes affordable to avoid overcapitalising? For more information on CGT (Capital Gains Tax) and Selling your investment, visit ATO.
TAX TIPS FOR SELLING YOUR INVESTMENT VIA YOUR INVESTMENT PROPERTY MAGAZINE
- CAPITAL GAINS TAX (CGT)
Provided you did not buy your investment property for the main intention of selling it at a profit, and you have not changed that intention during your ownership of the property, any gain you make from the sale of the property will be treated as a capital gain, rather than income. This is an important distinction because income is usually fully taxable, while a capital gain may be eligible for the CGT discount if the property is held by an eligible entity and has been held for at least 12 months before it is sold. The discount could be as high as 50% if the property is held in the name of an individual or a trust.
To calculate the capital gain on the sale of an investment property, the basic formula is as follows:
Capital gain = Capital proceeds – Cost base
If you are selling depreciating assets with your property, some of the contract price may be apportioned between the value of the depreciating assets sold and the property. If the sale values of each depreciating asset are not separately identified in the contract, this apportionment can be done on a reasonable basis. Generally, anything not attached to land or buildings is a depreciating asset, but given the potential complexities of the rules in differentiating them, speak to your accountant if you are not sure.
The attribution of some of the contract price to depreciating assets may give rise to a lower capital gain. However, if the amount apportioned to the depreciating assets exceeds the tax written down value of those assets, the difference will be a ‘balancing adjustment’ that is treated as income and is not eligible for the CGT discount. Therefore, you need to be careful to ensure that the apportionment does not create a worse overall tax position for you.
- MARKET VALUE SUBSTITUTION RULE
Be careful if you are not selling the property under an ‘arm’s length’ transaction, which may happen if you are selling the property to a family member, for instance. If the sale has not resulted from an arm’s length transaction, and the agreed sale price is less than the market value of the property (ie what someone unrelated to you under genuine commercial negotiations without any duress would be prepared to pay for the property), the ‘market value substitution rule’ will be triggered and you will be deemed to have sold the property at market value. This market value will be deemed to be the amount of the capital proceeds on the sale, regardless of the actual sale price on the contract.
- COST BASE
The cost base of a property, broadly speaking, includes the price you originally paid for the property, as well as the incidental costs (eg stamp duty, legal costs, and agent’s fees) you incurred in both purchasing and selling the property. These elements of the cost base are reasonably straightforward and the information should be easily obtainable if you have kept the relevant records.
- CUMULATIVE CAPITAL WORKS DEDUCTIONS
There are a number of special rules that could modify the cost base of the property. For instance, if you have previously been entitled to claim the capital works deductions on the property, you will need to reduce the cost base by the cumulative capital works deductions which you have been entitled to claim if you purchased the property after 13 May 1997. However, if you bought the property on or before this date, you will legitimately be able to avoid this clawback.
- NON-CAPITAL OWNERSHIP COSTS
If you bought the property on or after 12 August 1991, you can add to the cost base certain ‘non-capital ownership costs’ associated with that property that are not allowable as a tax deduction. For example, where the property ceased to be income producing for part of the time you owned it, the non-deductible expenses related to this time can be added to the cost base, including interest on funds borrowed to purchase and/or add capital improvements to the property, repairs and maintenance costs that are not capital in nature, insurance, and rates and land tax incurred on the property.
- PROPERTY FIRST USED TO PRODUCE INCOME
An often-overlooked modification to the cost base is when you originally bought the property for a non-income-producing purpose but subsequently put the property to income-producing use after 20 August 1996 – in which case you are deemed to have acquired the property when it was first used to produce income at its market value at the time. In other words, the original purchase price becomes irrelevant when determining the capital proceeds on the sale of the property and you should consider obtaining a valuation to support the market value adopted.
- GOODS AND SERVICES TAX
For completeness, you should always get advice on the GST consequences of selling the property, although nine out of 10 times the sale of residential premises generally does not give rise to any GST implications as the supply of residential premises is ‘input taxed’. However, if you are selling a commercial property, the GST consequences may be more complicated.
Read more here.
If you have gone through each of the above questions and tax implications and still decided it is time to sell here are a few things to consider to ensure you are doing everything correctly, and legally!
- Contact your property manager: This should be your first step! You will need to let your property manager know that the property will be hitting the market. Be sure to provide them with as much information as possible to avoid confusion (e.g. Agency it is listed with, Agents details, etc.). Once you have provided the property manager with the details, they will then inform the tenant. If your property management company sells as well, keeping all transactions under the one umbrella is probably going to make the whole process a lot easier.
- Maintain constant communication with your tenants: This is extremely vital when selling your investment. It is important to let the tenants know as soon as possible. The property manager will assist you with this and will endeavour to keep them informed every step of the way. You will need to issue the tenants with written notice of intention to sell (Form 10), and your agent will need to give them 24 hours notice before entering the property for a viewing (Form 9 Entry Notice). Some great ways to maintain a good relationship with your tenants throughout the process is to offer an incentive, this might be deducting the weekly rent or even offering a week’s free when the house sells.
- Photographing your property: As a landlord, you are entitled to take professional images of the property, however, you will need to have consent to take photos containing the tenant’s personal belongings. This is where the communication and strong relationship with your tenant comes into play.
- If your tenants want to leave: When tenants are issued a notice of intention to sell, they tend to get a bit uneasy. This may scare some tenants into leaving, in this case, it is important to know what they are entitled to. If you decide to sell within the tenants first 2 months of their fixed-term lease and have not issued a Form 10, they can terminate their agreement by providing the managing agency with a notice of intention to leave (Form 13). After the initial two months, the normal General Tenancy Agreement terms and conditions apply, unless you mutually agree to changes to the terms in writing.
- If you want the tenants to leave: If your tenants are on a fixed term lease and you would like them to leave for the duration of the sale, you legally cannot make them leave if they are complying with the GTA (General Tenancy Agreement). However, if you ask them to leave and they consent in writing, you can terminate the agreement mutually. If the tenant is on a periodic lease, you will only have to provide 4 weeks notice.
- It’s a good idea if you are considering selling at some stage that you communicate that with your property manager and only put tenants on shorter-term agreements, ideally 6 months. It is also a good idea to see what your property manager includes in their General Tenancy Agreement Special Terms and Conditions about selling properties, an agency should have a policy on this.
If you are currently renting a property that is listed for sale, do you know your rights and what you are entitled to throughout the process?
The first thing to do is not to panic. Just because the house is listed for sale, doesn’t mean you will be left without a place to live. The sale process isn’t instant and many investors buy properties that are ideal to rent out, so the new owner may also be an investor.
However, as a tenant, there are a few things that are expected of you during the sale. So it is important to ensure you are abiding by these rules to avoid any run-ins with your landlord or property manager.
- The first thing you need to know is that your General Tenancy Agreement is a legally binding document and terms and conditions of that agreement can only be changed if both parties agree in writing. Ie If you have two months left on your 6-month lease, but you and the owner agree that you can leave at a set date, that is fine, as long of both of you agree in writing.
- As a tenant, you are obliged to keep the property in a reasonable condition throughout the sale. This includes keeping it clean and tidy for prospective buyers.
- When the agent is showing the property, they are required to give you at least 24 hours notice (Form 9 Entry Notice) before taking people through, so you should have ample time to prepare the property.
- If the idea of staying in a property that is for sale is making you stressed and you would like to terminate your agreement, there are a few things you must take note of. If the property has been advertised within the first 2 months of a fixed term lease (including the renewal of the lease) and you have not been issued with a Form 10, you can terminate your agreement by issuing a Form 13.
- If after the initial two months, you would like to terminate your agreement, the only way to come to an arrangement is to make sure both parties agree in writing.
- You may be entitled to some form of compensation if you are requested to terminate early.
- If the property sells the purchaser will be informed of your agreement prior to signing the contract and will have to either agree to the terms, meaning you will remain in the property until the end of your agreement. If they decide they want to reside at the property sooner, they can either negotiate with you and you can both come to a mutual agreement in writing.
Selling a property can be stressful for all involved, whether you are a landlord or the tenant. If you have a professional property manager and sales agent working together with communication as key, it should be a smooth and stress-free selling experience for all involved.
iThink Property has a team of real estate agents in Ipswich and Toowoomba offering property sales and property management services. With a passion for people and property, iThink Property was conceived with the notion of building a team of good people to work in a real estate brand that did things differently. iThink Property focuses on transparency, communication, innovation and teamwork and has become a leading independent brand with unique points of difference. So whether you are thinking of buying, selling or renting, think iThink Property.
KYLIE WALKER – DIRECTOR – BUSINESS DEVELOPMENT & MARKETING
0439 895 808
A former sports journalist, Kylie Walker brings a wealth of communication and marketing skills to the team at iThink Property. The busy mother of four launched and developed the company’s rent roll and has organically grown the business with iThink Properties rental network now spanning Ipswich, greater Brisbane and Toowoomba.