Time to sell?

Question from Kim updated on 10th February 2017:

I have had a small rental in Avondale, Auckland since 2013. Last year I sold it to my LTC for 100% of the current registered valuation. I am living in my family home in West Auckland that has about 30% debt. As the rental hasn't grown massively in capital since I bought it is it a good time to sell it and look at investing outside of Auckland?

Our expert Nick Ashford responded:

Firstly, the sale to your associated LTC company will have re set the time clock for the bright line test. So if your LTC now sells it inside of two years any gain is taxable.

That said, I am a strong advocate of monitoring the net rental yields on properties against their current market values. It is true that these yields are now often less than the cost of funds, primarily because property values have risen faster than rents and interest rates look set now to track up. This means that more interest could be saved by selling and reducing debt than rent could be earned by retaining it. Obviously though, once its sold there is no longer any prospect of further capital gain.

One interesting exercise you can do is to draw a picture of what your financial position would look like with the property sold. Typically this will be all LTC debt gone and a further reduction in your home loan. Having put yourself in this position, ask yourself the question: Would I go back into debt to re buy the rental property at what its market value is today? If the answer is no, then perhaps you have come upon the realisation that its time to sell.

This decision is often easier when the sale will involve debt reduction. If the sale just releases cash then the dilemma is finding something better to do with your money than the asset you already sold. There are also no absolute right or wrong answers with this, your age and stage in life will certainly influence your decision.

Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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