The kids have finally left home, and now you’re rattling around in a house that is much larger than you actually need. If you are considering downsizing, there’s more to it than merely selling one house and buying another. Here are a few things to consider..
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 house 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.
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. They aim 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.
As an incentive to downsize, from 1 July 2018 Australians over the age of 65 are 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. The contribution must be made within 90 days of the change of ownership.
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.
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.
Downsizing has both financial and lifestyle dimensions, and you’ll want to make the most of any profits you realise. Speak to a financial adviser before you get the real estate agent in. Call us 1300 707 955 to speak to one of our qualified and experienced advisers, who can work with you to craft a short-term strategy to help ensure your downsizing experience supports you in achieving your long-term goals.