Financial expert’s tips for selling investment property after retirement, as parents warned about selling cheap to kids

As cost of living pressures mount for many Australians, some are choosing to sell their properties at a steep discount to family members who would otherwise struggle to enter the housing market.

But an expert has warned that the move, although generous, could backfire horribly and in some cases unprepared parents could be forced to rely on their children for financial support.

Super Guy founder and CEO Chris Strano said selling a property to a family at a discounted price can help avoid paying commissions and marketing expenses, while also allowing homeowners to transfer their wealth over their lifetimes.

“This allows you to see that your child is benefiting from your support and that you are sharing in that experience, rather than simply transferring assets after you die,” she said.

However, selling to family at a lower cost also has some significant financial risks.

Under the Australian Taxation Office market value replacement rules, capital gains tax is calculated on the market value of the property, not the discounted sales price.

This means sellers will receive less from the sale proceeds but will still be subject to tax as if the property had been sold at full market value.

Mr Strano also warned that the buyer would generally have to pay stamp duty based on market value, even if the sale was between family members.

The risks are even higher for anyone relying on investment properties to fund retirement, he said.

“Selling at a lower cost could impact your ability to meet your long-term retirement goals and cause you to run out of money — especially if your retirement investments and other investments are going to take a downturn,” he said.

“You may find yourself asking your children for financial help in the future.

“If you have more than one child, providing a property to one child at a discounted price can create a perception of inequality.

“Consideration should be given to how this will be balanced within your broader estate planning arrangements.”

While transferring investment properties to fund one’s retirement may have some drawbacks, Mr. Strano said there are five key benefits, including potential capital gains tax, loss of future returns and costs of sale.

1) Reduced risk

Even if you own several properties, each will likely represent a large portion of your wealth.

“By selling your investment property when you retire, you reduce dependence on that large asset to provide the return needed to meet your retirement goals,” Mr. Strano said.

“Your property may have generated good returns so far, but you need to consider what your retirement will look like if property prices fall 25 per cent, rents fall, major maintenance costs are incurred or you cannot find a suitable tenant for a long period of time.”

2) Liquidity

Covering retirement expenses will include receipts of investment income, such as rent or dividends, and withdrawals from capital.

This is easily accomplished with stocks or managed funds, Mr. Strano said, because small parcels can be sold each year to finance the capital reduction component.

“This is impossible to achieve with property because you can’t, for example, sell the bathroom and release some of the equity and keep the rest of the house,” he said.

“What if you wanted to spend $50,000 on a new car, an RV, or a vacation? You can’t just sell the living room.”

3) Diversification

Selling an investment property when you retire allows you to reinvest the proceeds into a portfolio that may be more compatible with retiree-friendly investment risk.

“So it’s a portfolio with more stable returns, lower volatility and more certainty of achieving the outcome you want,” Mr. Strano said.

4) Tax advantages

More importantly, you may pay less tax by selling an investment property, especially if you sell the property in the financial year after your last business-related income.

“This could mean less capital gains tax, depending on your other sources of taxable income for the year and how much of the income you can contribute,” Mr. Strano said.

If you have the ability to transfer proceeds into a retirement fund, this could also potentially reduce your future tax, he added.

5) Less stress

Managing an investment property can be stressful at times compared to more passive stocks and managed funds.

“Selling your investment property after retirement can mean you no longer need to manage tenants, real estate agents, advertising, maintenance, etc. – not to mention the costs associated with each of these,” Mr. Strano said.