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 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 like agent’s fees, removalist costs, and stamp duty. This will give you a better idea of how much additional cash you are likely to be left with.
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, then a portion of the gain may be subject to CGT.
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. But if qualifying for a pension is important to you, don’t free cash too much 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. However, the ‘asset rich, cash poor’ trap is more likely to happen so this isn’t always a good idea.
Super boost
As an incentive to downsizing a family home, Australians over the age of 60 make a contribution to super of up to $300,000 each from the proceeds of selling their home. The amount is treated as a non-concessional (after-tax) contribution, and exempt from the usual restrictions. The contribution should be within 90 days of the change of ownership.
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.
Be open to seeking professional support if moving does bring on a bout of the blues.
Seek financial advice
Downsizing a family home has both financial and lifestyle dimensions, and you’ll want to make the most of any profits you realise. Talk to your financial adviser and craft a short-term strategy to help ensure your downsizing experience support you in achieving your long-term goals.
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