Putting a house bought a few years ago up for rent, keeping a buy-to-let investment, or even renting an inherited apartment may seem like a logical choice in asset preservation strategy. However, it is often more profitable to sell your property in order to reinvest your capital into another property to get a higher return. Many reasons could motivate you to sell your property. We have analysed three:
The occupying owner that has bought a new primary residence
Selling your property when changing your primary residence often allows you to unlock significant capital, making possible the financing of a better, larger home. Should your financial capacities be sufficient to be able to buy without selling your current home, you could consider renting it out to keep a property asset.
However, considering selling instead of renting, and using the capital to invest in another property would strategically be a better decision for two reasons:
- There is no capital gain tax on a primary residence, which potentially allows you to make a significant non-taxable capital gain. Should you rent the property, it would be considered as a buy-to-let investment and the capital gain (calculated on the basis of the initial acquisition price) would be taxed as a long-term gain (at ½ of the global income tax rate).
- If your property has been built between 7 and 60 years ago (which is generally the case), it will generate a low depreciation rate in the context of a buy-to-let investment. On the contrary, either buying an off-plan property or a property older than 60 years requiring significant renovation works would allow you to benefit from a more favourable fiscal depreciation rate (up to 6% for an off-plan property) and on a higher basis (acquisition price of the new property instead of the initial acquisition price of your current property). This approach would allow you to save on taxes instead of paying more.
(…) it is generally more profitable to sell your property and reinvest the capital in another as it improves your return on investment, since return is heavily impacted by taxation.
On a purely financial point of view, omitting any sentimental consideration, it is generally more profitable to sell your property and reinvest the capital in another as it improves your return on investment, since return is heavily impacted by taxation.
The real estate investor
Even with an investor’s long term perspective, arbitrating your investments can allow you to improve your net return.
Four elements can motivate your decision to sell:
- Reinvesting in an off-plan property or a property older than 60 years requiring significant renovation work allows you to benefit from a more favourable fiscal depreciation rate (up to 6% for an off-plan property) and on a higher basis (acquisition price of the acquired property instead of the initial acquisition price of the currently owned property). For example, an off-plan property of 400,000€ (with a 35% land share) will benefit from a 15,600€ annual depreciation during at least 6 years. On the other hand, a 400,000€ property bought 10 years ago (taking in account a 5% annual price increase and a 25% land share) will only benefit from a 3,683€ depreciation. An arbitration here would allow you to take advantage of a fourfold annual depreciation. A difference that highly impacts your taxation, often at a marginal rate above 42,80%.
- Selling a property held for more than 2 years will benefit from relatively attractive taxation thanks to several deferral measures (acquisition price revaluation, ordinary lump-sum deduction renewable every 10 years). Furthermore, the capital gain tax rate has been halved from ½ to ¼ of the global income tax rate thanks to a temporary disposition effective for all sales before the 31st of December 2018. You can therefore make an arbitrage with little to no taxation. To determine your applicable tax rate, you can use the online tool my|GAIN.
- When selling you can make a capital gain and therefore have more funds to reinvest. In this way, an investor can expand his investments with the help of leverage. This leads to a better return on investment than with the initial capital. It is important to note here that the investor is more exposed in the case of a negative evolution of the market.
- If your tenant has given his notice to quit the property, the question of selling should arise. A property without a tenant will have a better value when selling as it allows the new investor to adjust the rent immediately, or for a buyer to occupy it immediately should he buy it for his primary residence.
The heir having acquired a property through inheritance
An inheritor often finds himself owning or co-owning one or several properties from his parents.
If the inherited property was the last primary residence of the parents, there is an additional 75,000€ lump-sum deduction on the applicable capital gain tax. Thanks to the revaluation factors and the accumulation of the 50,000€ ordinary lump-sum deduction (100,000€ for jointly tax payers) plus the 75,000€ inheritance lump-sum deduction, very low or no tax at all will have to be paid.
All the benefits described above concerning investors also apply to inheritors that have acquired properties through inheritance.
Lastly, whatever the scenario, selling a property allows you to reassess your investment in order to orientate your capital towards property with better yield or resale prospects. We advise to buy 1 or 2 bedroom apartments.
Lastly, whatever the scenario, selling a property allows you to reassess your investment in order to orientate your capital towards property with better yield or resale prospects.
Real estate advisors with the support of financial experts, can help you analyse your specific situation and evaluate the advantages of a sale scenario. The different fiscal, financial and real estate components of your project would be considered to guide you in your choice.
Which is great news, as a smart investment always starts with an informed decision!