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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.
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 overseas 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 houses.
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.
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.
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 aspects, 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.
AGS Financial Group Pty Ltd, ABN 70 093 990 946, trading as AGS Financial Group, are authorised representatives of AMP Financial Planning Pty Limited ABN 89 051 208 327 (Australian Financial Services Licence No. 232706). Any advice on this page is general in nature and does not take into account your personal objectives, financial situation or needs. Accordingly, you should consider the product disclosure statement for any product and your own objectives, financial situation and needs before acting on this information and before acquiring a financial product. You can obtain a copy by contacting us on 02 9966 8188.
Financial planning, corporate benefits and mortgage services are provided by AGS Financial Group Pty Ltd ABN 70 093 990 946, an Authorised Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 (AMPFP), AFS Licence No 232706. Accounting, taxation, and business advisory services are provided by AGS Accounting Pty Ltd ABN 12 166 728 696. Liability limited by a scheme approved under Professional Standards Legislation.