Ins and outs of investing in property for retirement

Planning for a financially secure retirement involves strategically allocating your assets. A popular option is investing in property, which can provide immediate income and long-term capital growth. However, this approach comes with its own set of benefits and challenges. Here, we examine the ins and outs of property investment as part of a retirement strategy, focusing on tax liabilities, the implementation of a Self-Managed Super Fund (SMSF), and the relevant Australian taxation laws.

Over the past ten years, the Australian property market has ebbed, flowed, and been reasonably sensitive to external factors. Traditionally, it has demonstrated an upward trend primarily due to population growth, increased urbanisation, and economic stability. The COVID pandemic saw significant fluctuations and unbalanced results in many regional areas nationwide. From 2020-2023, the property market experienced a resurgence, with some areas experiencing double-digit gains, highlighting the market’s resilience. Investing in a growing area should be a safe option, and the property value has the potential to appreciate significantly over the long term.

Investing in residential or commercial property creates a diversified income stream. In previous articles, we talked about the value of having secondary and alternative income streams to protect against unforeseen circumstances and as a strategy to build financial resilience. Rental properties can generate a steady stream of income, which can be valuable during retirement when regular income from employment ceases. Leveraging is another compelling point. You can often borrow funds to purchase property, magnifying your potential return on investment. Investing in property can serve as an inflation hedge. As prices rise, so do property values and rents, which can protect your purchasing power while leveraging is another compelling advantage. You can often borrow funds to purchase other investment property, magnifying your potential return on investment.

There are tax advantages to investing in property as a retirement strategy. Negative gearing allows investors to deduct a range of costs. Mortgage interest, maintenance costs, and depreciation can be deducted from their taxable income. This is most advantageous at the early stages when rental income may not cover the establishment costs. It is essential to understand that negative gearing is a topic of discussion within the Government, and its benefits to investors may well be reduced or eliminated.

A popular strategy for Australias is using an SMSF (Self Managed Super Fund) to invest in property. The rental income generated within an SMSF is taxed at a concessional rate of 15%, this is significantly lower than the marginal tax rates that apply to income earned outside of superannuation. This lower tax rate means more of your rental income stays within your SMSF, allowing your retirement savings to grow faster. The income can be reinvested within the SMSF, potentially leading to more significant wealth accumulation over time.

Capital gains tax is another area where SMSFs offer a distinct advantage. If your SMSF holds property for more than 12 months, the capital gains tax on any profit made from selling the property is reduced to just 10%.

The most compelling tax benefits of using an SMSF to invest in property come into play when you transition into the pension phase. Once you begin receiving a pension from your SMSF, the income generated by the property and any capital gains realised on the sale of the property can become tax-free.

This means that, during retirement, you could receive rental income from the property without paying any tax on it. If you decide to sell the property while in the pension phase, you could do so without incurring any capital gains tax.

The primary drawback is the entry costs. Purchasing property comes with a significant outlay. The deposit, stamp duty, legal fees, and ongoing costs like maintenance can be prohibitive without taking on considerable debt, which comes with its own risks. Unlike shares or cash deposits, property is not a liquid asset. If you need to access your funds quickly, selling a property can take time, and market conditions may not be favourable.

While there are tax benefits, property investors must also be mindful of potential tax liabilities. For example, if you sell an investment property for a profit, you may be liable for capital gains tax (CGT). Land tax may apply depending on the value of the property and the state in which it is located.

Property investment is work, and it requires ongoing management. These responsibilities include finding and managing tenants, maintaining the property, and complying with legal obligations such as safety standards and tenancy laws. These responsibilities can be time-consuming and may require professional assistance, which adds to the cost.

Property investment, as part of a retirement strategy, can offer significant benefits. However, it also comes with risks and challenges, such as high entry costs, liquidity issues, and the complexities of managing an SMSF. Before deciding, it’s crucial to assess your financial situation, understand the tax implications, and seek professional advice to ensure that property investment aligns with your long-term retirement goals.

Step Up Financial Group is a team of qualified financial specialists. We help hundreds of Australians create financial stability every year while building toward a confident retirement. If you are considering investing in property as part of your retirement planning, contact us for experienced, compassionate, and professional financial planning advice.