The kids have finally left home and now you’re rattling around in a house way bigger than you need. If it’s time to think about downsizing, there’s more to it than simply selling one house and buying another. Here are a few things to consider.
Tax-free gain
Selling a large house and buying a townhouse or unit, perhaps in a more affordable suburb, can free up a significant sum of money which you could use to help fund your retirement or take that dream international holiday. But before you get too excited by your potential windfall, remember to take into account expenses such as agent’s fees, removalist costs and stamp duty on the new property. This will give you a better idea of how much additional cash you are likely to be left with.
Generally, any capital gains on the sale of the family home are exempt from capital gains tax (CGT). However, if the home has been used for income-producing activity, such as running a business or letting out a room, then a portion of the gain may be subject to CGT.
On the upside, downsizing may reduce your living costs. New homes are usually more energy efficient, and cost less to heat and cool than older housing stock.
Centrelink considerations
The family home is exempt from Centrelink’s age pension asset test. If qualifying for a full or part age pension is important to you, you may not want to free up too much cash when downsizing.
Indeed, some retirees actually dip into their savings to buy a higher value home. Their aim is to reduce their assessable assets and maximise their pension entitlement. This isn’t always a good idea as it increases the risk of being caught in the ‘asset rich, cash poor’ trap.
Super boost
As an incentive to downsize, the federal government has proposed that from July 2018 Australians over the age of 65 will be permitted to make a contribution to super of up to $300,000 each ($600,000 for a couple) from the proceeds of selling their home. The amount will be treated as a non-concessional (after-tax) contribution, and exempt from the usual restrictions. But this proposal has yet to be legislated. For most people under 65, super may also be a desirable destination for most of the money freed up by downsizing. Make sure that any contributions fall within the relevant limits.
Emotional cost
While the financial benefits of downsizing can be considerable, moving house is amongst life’s most stressful events. This is particularly the case when you are giving up a home full of family memories, and parting with many prized possessions to fit into a smaller space. Just being aware that you may face an emotional reaction is a start, but be open to seeking professional support if moving does bring on a bout of the blues.
Seek financial advice
Downsizing has both financial and lifestyle dimensions, and you’ll want to make the most of any profits you realise. Talk to your financial adviser before you get the real estate agent in. He or she will work with you to craft a short-term strategy to help ensure your downsizing experience supports you in achieving your long-term goals.
Disclaimer
This information is current as at 08/01/18.
This article has been prepared by Heart1Stop, a social media brand owned by Heart Mortgage Services and Heart Financial Advisers. The information contained in this article is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The views expressed here are not those of Heart1stop, Heart Mortgage Services, Heart Financial Advisers, shareholders, directors or staff and associated contractors and business associates. This article has been prepared without taking into account any person’s objectives, financial situation or needs. Because of this, you should, before acting on any information contained in this article, consider its appropriateness, having regard to your objectives, financial situation or needs. Any taxation information contained in this article is a general statement and should only be used as a guide. It does not constitute taxation advice and is based on current laws and their interpretation. Each individual’s situation may differ, and you should seek independent professional taxation advice on any taxation matters. While the information contained in this article may contain or be based on information obtained from sources believed to be reliable, it may not have been independently verified. Where information contained in this publication contains material provided directly by third parties it is given in good faith and has been derived from sources believed to be accurate at its issue date. It is not the intention of Heart1Stop or Heart Mortgage Services and Heart Financial Advisers that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. To the maximum extent permitted by law: no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up to date or fit for any purpose; and no party of Heart1Stop or associated entities as mentioned is in any way liable to you (including for negligence) in respect of any reliance upon such information. This article may also contain links to websites operated by third parties ("Third Parties") who are not related to Heart1Stop. These links are provided for convenience only and do not represent any endorsement or approval by us.
