Damon Mcknight
There are many options for what to do with the money from the sale of a house in Australia. The income from selling a property typically belongs to the seller or property owner, but the date when the seller receives the income and how much of it they keep can be confusing. It's important to get good advice from the right people, such as a financial planner or accountant, before making any major investment decisions. Some options for what to do with the money include paying off existing debts, investing in a syndicate, or buying another property.
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What You'll Learn
Paying off debts
If you have existing debts, such as a housing loan, car loan, business loan, or credit card debt, you may want to consider clearing these before investing your money elsewhere. Paying off a loan that charges you annual interest could significantly improve your cash flow. However, whether paying off your debts is a good idea depends on your financial position and strategy. It is always recommended to consult a financial planner or accountant before making any major financial decisions.
If you're struggling with your mortgage payments and facing foreclosure, selling your home could allow you to pay off the mortgage and avoid the negative impact of foreclosure on your credit score. However, selling your home to pay off debt should be a last resort after exhausting all other alternatives. You should consider tightening your spending in other areas, finding ways to boost your income, and putting every spare dollar towards paying off your debt.
If your house has increased in value since you bought it, or if you have paid down your mortgage and hold a good amount of equity, you may make a profit from selling. With the money from the sale, you can pay off any remaining mortgage and other debts. However, you should be aware of the various expenses involved in selling a home, such as agent fees, staging costs, and legal fees. These can eat into your profits, so it's essential to factor them into your calculations when deciding whether to sell.
It's also important to consider the potential opportunity cost of selling your home. If you live in an area where home prices are expected to rise, selling now could mean missing out on future appreciation and the potential to make a bigger profit later. Additionally, if you sell your home to pay off debt, you may be left with little or nothing to show for the equity you built while paying down your mortgage.
Finally, selling your home to pay off debt may not always be the best solution. If you're "upside-down" on your mortgage, meaning you owe more than the house is worth, the sale may not produce enough funds to pay off your debt. In this case, you may need to explore other options, such as refinancing or negotiating with your lender, to find a solution that works for your financial situation.
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Investing in a syndicate
A property syndicate, also known as an unlisted property trust, pools the funds of multiple investors to purchase an investment property (or properties) that may otherwise be too expensive for individual investors to access. This type of investment has been popular since the 1980s and 1990s as investors sought diversification in their portfolios.
There are different types of property syndicates, including wholesale and retail syndicates, with varying minimum investment requirements. Each syndicate will also have different objectives. For example, a syndicate might focus on properties with quality tenants and long-term leases, or it might invest in distressed assets with development potential. A syndicate can invest in a single property or a group of properties. Generally, investing in a single property syndicate is riskier, but it can provide regular cash flow, tax benefits, and the potential for capital gains.
Before investing in a syndicate, it is important to do your due diligence and consider various factors, including:
- Property type: Is the syndicate investing in a development opportunity or an existing property? Development opportunities typically carry more risk and may not provide returns during the initial development stage.
- Management: What is the experience and qualifications of the syndicate's management team?
- Liquidity: Your capital may be tied up for a fixed period, typically ranging from 5 to 10 years.
- Interest rates: Will changes in interest rates affect the syndicate's investments?
- Government policy: Will changes in government policy impact the syndicate's operations?
- Yield: What is the expected yield, and how is it derived?
- Costs: Consider insurance, management, marketing, and exit fees.
- Track record: Assess the fund's history of success in the property market. Look into their best and worst investment results and how they have consistently added value.
- Credentials: Verify that the syndicate manager is licensed and compliant with regulatory standards. In Australia, look for the AFSL (Australian Financial Services License), which indicates compliance with the Australian Securities and Investments Commission's regulations.
- Distribution frequency: Inquire about the frequency of payouts (monthly, quarterly, or annually).
Remember, it is always a good idea to discuss any major investment decisions with a financial planner or accountant.
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Renting out the property
If you're looking to rent out your property in Australia, there are a few things you should keep in mind. Firstly, it's important to understand the different types of tenancy agreements. In Australia, the two main types are fixed-term and periodic tenancy. Fixed-term tenancy agreements are for a specific period, usually six or twelve months, while periodic tenancy agreements are on a rolling basis, typically fortnightly or monthly. As a landlord, you must also comply with local laws and tenant rights, which vary by state.
Before renting out your property, it's essential to review the local government's standard rental form. For example, in Western Australia, you would use Form 1AA, while in New South Wales, you would use the standard residential tenancy agreement. In Victoria, you have the flexibility to create your own agreement, but it must align with the government's sample. Additionally, you can charge a bond, similar to a deposit, to protect against potential damage. The amount you can charge for the bond varies between states and territories.
When setting the rent, you are generally free to decide the amount. However, there are regulations in place regarding how frequently you can increase the rent, and these differ based on the type of tenancy and the state. For instance, in New South Wales, you can increase the rent multiple times as long as you provide 60 days' notice, whereas in Queensland, Victoria, Tasmania, and Western Australia, you can only increase it once every six months with the same notice period.
It's also important to be mindful of tax implications when renting out your property. Once your home becomes an investment property, you'll need to report the rental income on your tax return. You may also be subject to capital gains tax (CGT) if you rent out your property without living in it for at least 12 months prior. Consulting a financial expert or mortgage broker is advisable to understand the financial implications, including potential refinancing options.
Lastly, as a landlord, you have specific legal obligations to ensure the safety and privacy of your tenants. This includes installing proper locks, conducting regular safety checks, and installing smoke and carbon monoxide detectors. Familiarising yourself with rental agreements and tenant privacy and maintenance rights is crucial.
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Using a financial advisor
If you've sold your house and are now sitting on a large sum of money, it's a good idea to get advice from a financial advisor. A financial advisor can help you make financial decisions and plan for the future. This might include advice about budgeting, investing, superannuation, retirement planning, estate planning, insurance, and taxation.
Before you get financial advice, it's important to decide what you want to get out of it. This will depend on your stage of life, how much money you have, and what you're trying to achieve. For example, if you are selling an investment property, you might be looking for the next property to buy. Or, you might want to put the money into a term deposit with a bank, as recommended by Marisa Broome, principal of wealthadvice.
When choosing a financial advisor, it's important to select someone who offers the right services for you. You can find a licensed financial advisor through a search on the financial advisors register. The best way to see what a financial advisor offers is to read their Financial Services Guide (FSG). This will show you the services they are authorised to offer and the product areas they can advise on. It will also outline how they charge and earn commissions and benefits.
It's important to note that anyone who gives personal financial advice and most general advice providers must have an Australian financial services (AFS) licence. Be aware that currently, there is no restriction on who can use the title "financial advisor", so it's important to do your research and ask the right questions before engaging someone. For example, you might want to ask about their qualifications and experience, as well as how they charge for their services.
Once you've chosen a financial advisor, they will prepare a financial plan for you, which will be presented to you in a document called a Statement of Advice (SOA). This document will explain how the recommended strategy fits your financial goals, risk profile, time frame, and financial situation. It will also outline how investments will be managed and any recommended products. You should always feel comfortable with your advisor and their advice and don't feel pressured to accept their recommendations. If you have any questions or concerns, be sure to discuss them with your advisor.
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Understanding tax implications
When it comes to selling property in Australia, taxes are one of the many costs you need to budget for. The most obvious tax you're likely to incur when selling is Capital Gains Tax (CGT). However, in some cases, you could be exempt from paying CGT.
If the property has been your primary home for the entire period you've owned it, you're generally exempt from paying CGT. This is known as the 'main residence' exemption. Additionally, if you bought the property before 20 September 1985, you're also exempt from paying CGT, as this was the date CGT was introduced in Australia. Any assets purchased before this date are considered 'pre-CGT assets'.
However, there are situations where the gain arising from the disposal of your main residence may be liable for CGT. For example, if you use part of your property to earn assessable income, that portion of the profit may be taxable. The proportion of the property used for this purpose and the period it was used for income-producing activities will be considered in calculating the taxable amount.
If you are impacted by the exemption, you or your accountant will need to calculate the taxable portion of the profit. The cost base of the property, or its market value when it was first used to produce income, will be used to determine the capital gain. You may be able to reduce your capital gain by claiming costs incurred on the sale of the property, improvements, and other relevant expenses.
It's important to note that specific rules and exemptions apply, so consulting with a tax professional or the Australian Taxation Office (ATO) is advisable to understand your individual circumstances.
In Australia, your capital gain is added to your assessable income and taxed at your marginal tax rate. However, if you've owned the property for more than 12 months, you're likely eligible for the CGT discount, which means you'll only pay tax on 50% of the gain.
To summarise, while there are exemptions and ways to reduce your CGT liability, it's essential to understand the tax implications and seek professional advice to ensure compliance and maximise your financial gains when selling a property in Australia.
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Frequently asked questions
This depends on your personal circumstances and financial goals. Many people seek financial advice to understand their options and make a plan. Here are some common options:
- Pay off existing debts such as loans or credit card balances.
- Reinvest the money in another property or a property syndicate.
- Put the money in a term deposit or savings account.
- Invest in shares.
- Use the money to fund your next home purchase.
You may have to pay Capital Gains Tax (CGT) on any profit you make from the sale. CGT applies to property that is not your primary residence, including investment properties, holiday homes, and properties you have rented out. Your family home is usually exempt from CGT.
This depends on the sale price and the fees involved. You may have to pay agent commission, marketing costs, and legal fees.
Agent commission, marketing costs, and legal fees can all eat into your profits. You may also choose to pay for a licensed conveyancer to help you navigate the settlement process and avoid costly errors.
Most people choose to sell their old home first to free up equity and establish a budget for their new home. However, this can lead to the stress of managing two processes at once and the potential for rising real estate values to price you out of the market. Buying first may be a better option in some circumstances.
