WHY FINANCIAL PLANNING IS NEEDED BEFORE AND AFTER SELLING A RENTAL PROPERTY!
Before Selling the Property:
Tax Implications: Consider the tax implications of selling your property. You may need to pay Capital Gains Tax (CGT) on the profit from the sale. Plan how to optimise your tax position and understand the records and documentation you need.
Six-Year Exemption Rule: If you move out of your main residence and rent it out, you can treat it as your main residence for up to six years and still claim a CGT exemption upon sale. The exemption test needs to be satisfied.
Partial Exemptions: If the property was used both as a main residence and for income-producing purposes (e.g., rental), you may qualify for a partial exemption.
Documentation: Keep detailed records of: Acquisition and disposal of contracts, settlement statements, running costs of owning the rental property, and improvement records.
Pre-1985 Acquisitions: If you acquired your property before 20 September 1985, it is exempt from CGT. You do not need to keep records for CGT purposes unless you later add a capital improvement. However, you still need to keep records of any property income, such as rent, for income tax purposes.
Timing of a CGT event: The date of the CGT event for disposing of your property is the date you enter a contract for the sale of disposal, not the settlement date.
Duration of Ownership: Maintain records of the period you owned the property, as this affects CGT calculations and eligibility for exemptions.
50% CGT Discount: If you held the property for more than 12 months, you might be eligible for a 50% CGT discount, effectively halving your capital gain.
Foreign Residents: Note that foreign residents are not eligible for the 50% CGT discount on gains accrued after May 8, 2012.
After selling property: Financial Planning: Consider how the proceeds from the sale will meet your overall financial plan.
Keeping Records: You must hold records for at least 5 years after the sale of the property, or the year you declare a capital gain. If you make a capital loss, once you’ve offset the loss against a capital gain, keep records for another 2 years.