Selling your investment property? Avoid these common and costly mistakes |
One of the biggest tax mistakes property investors make is seeking advice after they have already sold their investment property. However, by that point, much of the tax planning opportunity has disappeared.
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Every year, I meet investors who have just exchanged contracts on a property and want to know how they can reduce the capital gains tax bill.
Unfortunately, in many cases, the answer is that there is very little that can be done.
The decisions that matter most are often the ones made six, 12 or even 24 months before the sale.
In my experience, investors tend to focus heavily on maximising the sale price and surprisingly little on managing the tax consequences.
Yet the difference between good tax planning and no tax planning can amount to tens, or even hundreds, of thousands of dollars.
The reality is that tax should never drive an investment decision, but it should absolutely influence how and when you execute it.
"l'll sell in a low- income year"
The most common piece of tax planning folklore I hear is that investors should simply wait until a year when their income is lower.
While there is some truth to this, it is often oversimplified.
Yes, capital gains are added to your taxable income, so selling during a year when your income is lower can reduce the ultimate tax cost.
But investors frequently underestimate how difficult it is to engineer a genuinely low-income year.
Many property owners are at the peak of their earning capacity precisely when they are considering selling.
Waiting for retirement may make sense in some circumstances, but delaying a sale purely for tax reasons can sometimes expose investors to market risk that outweighs any tax saving.
I often remind clients that paying less tax on a smaller gain is not necessarily a better outcome than paying more tax on a much larger gain.
The forgotten importance of ownership structures
Perhaps the biggest planning opportunity is one that cannot be fixed after the event: ownership structure.
The property boom of the last decade has created many accidental tax problems.
Investors who purchased........