Financial considerations when selling your investment property

When purchasing an investment property, stamp duty and lender’s mortgage insurance (LMI) can amount to tens of thousands of dollars; when selling, you’ll be handing over a decent sum of money in real estate commission.

Once you factor in capital gains tax upon selling — and, if you plan to purchase again, stamp duty on another property — it becomes clear that buying and selling real estate can be an expensive exercise.

The costs involved have increased significantly over time. For those who began investing in property years ago, the associated costs of buying and selling were far lower than they are today.

You might have paid $10,000 to $12,000 in stamp duty on a property with a purchase price of $350,000, and LMI of a few thousand dollars. Now, median values have grown and LMI has increased substantially since the GFC, so your acquisition expenses on an average priced property of $600,000 could easily exceed $25,000.

This creates uncertainty for investors who are considering selling. It’s not a decision that should be made lightly, and selling an investment property should only become an option if it really makes sense. But how do you know when this is?

When to consider selling

  • If the property is causing you financial stress: if, for whatever reason, it is becoming too difficult to keep up with your repayments and you have exhausted all options (you’ve tried to refinance or increased the rent), then selling might be the only way to alleviate that stress.
  • If the property is not growing in value: did you buy real estate that simply failed to perform? If it’s located in a regional market, it could be five or even ten years before the property increases in value in a meaningful way. There comes a point when it makes sense to cut your losses and invest again in a better location. It is a hard decision because of ‘cognitive biases’. Investors tend to hang on to a losing position because they have already invested so much in time, effort and money. The same is valid for people buying shares; they hate to crystallise a loss.
  • If you are losing a substantial amount on the property: you might be able to comfortably afford the costs, but if it’s costing you a small fortune is it really a good investment? We know of an investor who was losing $22,000 per year after tax on his investment property. He was earning a six-figure salary so he could afford to hold the property, but that didn’t necessarily mean he should!

Keep in mind …

While you’re debating whether or not to sell your property, consider the following four points:

  • The costs of selling: you will generally pay real estate agent’s commission of around 2% to 3% of the sale price. This can amount to tens of thousands of dollars; for example, on a sale price of $650,000 the agent’s commission will be $13,000 to $19,500. Fortunately, it is tax deductible.
  • Finance: according to one report, mortgage brokers believe that around one-quarter of borrowers who qualified for finance last year would not be approved this year. If you sell your property you may not qualify for finance on a new one, so before you sell speak to your mortgage broker to get a firm idea of your borrowing capacity.
  • Tax: although the costs involved in buying and selling property are high, many of them (such as real estate agent’s commission) are tax deductible. In addition, expenses such as stamp duty can be added to the property’s cost base when you sell, allowing you to minimise your capital gains tax.
  • Capital gains tax: if the property is an investment, you will have to pay capital gains tax. It would be wise to speak with an accountant before you make a decision, as they can model the costs and taxes and help you make an informed decision about the best way to move forward.