Should you sell your investment property to pay off your house?

A question that is coming up a lot lately for my clients is whether they should sell their investment property to clear their mortgage.

This is a great question and one we will analyse as part of any financial plan.

In this blog post, I’ll break down the questions we go through when determining whether this is a good option or not.

1. Was this part of your financial plan to begin with?

Buying and selling houses is a very expensive endeavour. Between stamp duty, sales costs and general costs, as a rule you’ll want to hold onto a property for a long time to see the gains that justify these expenses.

But at some point, the goal is to get some value out of your investment property.

If you’ve held the property for a long time and feel you’ve got some good gains, now may be a great time to think about taking advantage of this.

By selling and paying out your mortgage, you really open a lot of lifestyle options that didn’t exist to you prior.

If now isn’t the time to sell, it is a good time to reflect and ask yourself “when do I intend to sell or what needs to change in my finances before I sell this property?”.

2. Are you happy to give up the potential future upside for certainty?

By buying an investment property, you are putting more money into the market with the hope that it will go up in value. Historically with property this has been a good bet and you may have made a lot of money.

If you continue to hold, it’s possible that you may make even more if the market continues to go up.

By selling the property however, you prevent this possibility.

Whilst making money is good, it needs to be balanced against the certainty that selling it provides. By selling your investment property and paying off your house, you have a guaranteed return of no longer having to pay interest on your home loan anymore.

Earlier in your life, taking some risks to get some returns is a great strategy but as you get older, trading some of those returns for certainty can make a lot of sense.

3. Can you direct the mortgage money to more tax efficient investments such as super?

As you get closer to superannuation access age, it’s important to think about your strategy on moving investment money into super.

When you reach super access age and start taking a pension, the tax in your super goes to nil on income and capital gains (subject to caps).

When you’re young, you may not want to direct as much money to your super as you are giving up the flexibility of accessing it in the short-term.

If however you’re in your 50s and 60s, the trade-off of locking your money away for a couple of years may make a lot of sense for the tax benefits.

If you do intend to sell your investment property, it’s important to not only have a plan for the proceeds of the sale, but also how you’ll direct your mortgage repayment (which you’re no longer making).

You may decide to use this for lifestyle expenses but you want this to be a conscious decision as money in accounts has a way of disappearing on expenses you don’t even notice and that don’t add value to your life.

4. Is this the right time to sell for tax purposes?

Selling an investment property can have really big tax consequences. Whilst shares are a little more flexible allowing you to sell off parcels each year, selling a property needs to be done in one go.

If you’ve made a decent amount of money, this may push you into the highest tax bracket where those capital gains are getting taxed at 47% (subject to the CGT Discount).

In these circumstances, there are ways you can be smart about this such as deferring the sale until after you’ve ceased work and your tax rate is a lot lower.

Other options also include doing it in a year where you take a capital loss or alternatively, use catch up contributions to super to reduce your taxable income.

In any event, the timing around the sale of the property can add up to big dollars and is something you don’t want to get wrong.

Whilst these questions aren’t exhaustive by any means, they are a good starting point to go through when thinking about selling your investment property to pay out your mortgage.

If this is a question on your mind, then please reach out. As part of financial advice, we will model out a plan which outlines how to sell down the house in a tax efficient manner, pay out your mortgage and start to prepare yourself for retirement.

If you’d like to get in contact us, please go to www.bouncefinancial.com.au and drop us an enquiry on our contact us section.