20th Apr 2017

Downsizing: how house sale proceeds are assessed

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Senior woman considers downsizing age pension australia
Debbie McTaggart

Like many older Australians, May is considering downsizing, but she’s unsure how selling her home will affect her Age Pension. Debbie explains how the proceeds are assessed.

Q. May

I am on a part Age Pension and thinking of selling my home and buying in a different location. Will this affect my Age Pension or is there a time frame to allow the purchase of a new home? What are Centrelink’s rules on this?

A. Many people choose to sell the family home to release some equity and make life in retirement a little more comfortable financially. This may seem like a good plan, but if you receive a payment from Centrelink, including the Age Pension, the money released by the sale proceeds could have an effect on how much you receive.



To help you make the most informed decision, you should seek advice from an independent financial planner. But if you’re seeking an overview of how Centrelink will assess the proceeds from the sale of your home, here is what you need to know.

When you sell your principal residence, the proceeds from the sale that exceed the amount that you intend to spend on a smaller home are assessed immediately. The amount you intend to use to purchase a new residence can be an exempt asset for a period of 12 months. This is to give you time to choose a suitable home. Should something prevent you being able to do so within the time frame, you can apply to the Department of Human Services to have this period extended by up to 12 months.

All the proceeds from the sale that are held as financial assets deemed to be earning income.  

Any deemed income will be assessed under the income test, which may affect your Age Pension payment. Your Age Pension payment is reduced by 50 cents for every dollar by which you exceed the income test threshold. To view the current income limits, visit YourLifeChoices.com.au

Any amount leftover after you buy your new home is considered an asset and will be assessed as such. Your Age Pension payment is reduced by $3 for every $1000 by which you exceed the assets test threshold. To view the current asset income limits, visit YourLifeChoices.com.au

When the income and assets test are both applied, your Age Pension payment is the lower amount of the two. So, it is important to understand from the outset that whilst downsizing a family home for a smaller, less expensive property may free up your capital, it could also result in a loss of, or reduction in, your Age Pension income.

Related articles:
What to ditch when downsizing
Your guide to downsizing

 

 

 

 





COMMENTS

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casey
1st May 2017
11:05am
I downsized from a large house on acreage, it left me with too much money and I could not get the pension. I am not happy and would like to go back to a larger house with more land. If I did, would I then be legible for the age pension?
Rosret
1st May 2017
12:00pm
Yes. People in my area are selling their city homes and buying mansions. Asset rich and cash poor - its not really very good for our region. Rates go up and yet these people have no money to spend in the local town because its tied up in a house.
Its not new, its been happening for decades.
It is better to do the right thing and not depend on the government for money. However you don't need to live in an apartment.
Find a smaller home with a garden and enjoy not having big brother looking into your finances with their Robo flop.
Rae
1st May 2017
12:23pm
Yes Rosret I agree not having to deal with Centrelink is a bonus.

People have to be careful though even with Investor Advice. I know one lady who sold in a panic when her husband was diagnosed with alzheimer's to move into a retirement village. The pension has now been cut off. The medications and ongoing costs are very high with no relief from government but the advisor did okay.

She is beside herself worrying how to pay for ongoing medicals and how to pay for nursing home care when necessary at full price.

A whole lifetime of working at running business seven days a week and there will be nothing left to show for it at the end.
HS
1st May 2017
12:36pm
casey - Because of people's mentality, like yours, the government will introduce a threshold on the value of your principal residence, probably at $450,000 or less in order to qualify for the age pension.
HS
1st May 2017
12:39pm
Rae- when this lady falls below the threshold for Age Pension she will qualify.
Old Geezer
1st May 2017
1:34pm
This is the main reason why the house should be included in the assets test. Another one is that you can give away the difference between the costs of the two houses when the first house is sold without it affecting your OAP.
sunnyOz
1st May 2017
1:50pm
Strongly disagree with a generalised value put on houses as a threshold. HOW can you equate a house value in Sydney to (say) Cunnamulla Qld? A basic run down house in some places could valued well over this, whilst a large comfortable home in country could be valued well under this. What you get for $450,000 would be HUGELY different. I suppose there will be a whole new Govt Department set up to monitor and oversee it!
Rosret
1st May 2017
6:13pm
Yes, sunnyOz I agree with you and sometimes the OAP has a family residing their home as well so they can work in the city. It causes untold stress including the family home in the threshold and the housing bubble can just mean a humble home is all of a sudden no longer be a place where they can live. The last time it was introduced many old people committed suicide due to the loss and connection to their family and infrastructure. A terrible scenario.
Oldman Roo
1st May 2017
6:25pm
sunny Oz , I totally agree with you and can not see how including the house in assets could ever be a workable solution .
There will be elderly with no income living in family homes that can be worth Millions and I would never advocate to force them out of their homes . Additionally , of course , the Politicians would be excluded , Surprise , Surprise !
The Politicians would also become very unpopular with family and friends .
niemakawa
1st May 2017
6:51pm
@Rosret, The Government depends on me and some others for money!!
HS
1st May 2017
8:11pm
sunnyOz- The answer is that a line has to be drawn at a point where the government can look after the needy at a reasonable affordable expense. An aged person who cashes in a $850,000 owned home can be self sufficient with an annual drawdown of $30,000 per year for the next 24 years up to 89-91 years of age. If the future OAP rules still apply then they can apply for the pension when the need arrives.
niemakawa
1st May 2017
8:30pm
@HS I assume you mean $ 850,000 left over after buying another home.
niemakawa
1st May 2017
8:35pm
@Old Geezer. Are you sure? I think questions will be asked (by Centrelink) if suddenly the difference between the sale/purchase prices has "disappeared. See my separate post.
Rainey
2nd May 2017
2:48pm
OG is wrong. You cannot just give the difference away. If you do, anything over $30,000 is classed as an asset for 5 years, and even the $30,000 can only be gifted at a maximum rate of $10K per annum.
HS
3rd May 2017
5:16am
niemakawa- No, I don't mean that, because if someone had $850,000 left over after buying another home they would not qualify for the pension. I mean an outright disposal and you live off that until it's spent down to a level acceptable to qualify for the pension.
HS
1st May 2017
12:22pm
"Any interest earned will be assessed under the income test, which may affect your Age Pension payment. Your Age Pension payment is reduced by 50 cents for every dollar by which you exceed the income test threshold"

Debbie McTaggart
Not really!
The interest earned from funds in the bank/investment is not subject to income test. Only the amount of your declared amount of money in the bank/investment is subject to the Income Deeming Rule (IDR) up to the amount of the threshold. DHS deems how much you are earning by their first consideration - IDR - and that's all. If you earn more interest than their IDR estimate, this is not taken into account. Also the first $4,212 of annual earnings is deducted from the IDR estimate. From memory, one can have up to $150,000 in bank funds before IDR begins to diminish your full pension. The total value of funds and material assets (except your principal residence owned home) add up toward the Assets Test which is the second consideration subject to a different estimate calculation in addition to the IDR calculation to test whether one exceeds the all up threshold or not. One can easily estimate themselves how they may be affected by using the online Centrelink pension calculator.
http://yourpension.com.au/APCalc/index.html


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Bes
1st May 2017
1:49pm
Looks like we'll stay in our 'home' of 25 years then!
ex PS
3rd May 2017
5:03pm
It certainly doesn't look like it would be worthwhile down sizing.
Liverpool Anne
1st May 2017
2:49pm
Whatever you do the Pollie Turkeys will get you, one way or another
adbob
1st May 2017
4:50pm
Contrary to what our financial wizard above says giving away the difference (eg to children) *will* affect your pension as the gift will be added back to your assets test total assets calculation for five years.

Also note that in the case of financial assets the imputed interest will affect your income test too - *not* the actual interest.

It defies belief that anyone who had the nous to earn this money in the first place would want to consult a financial adviser - even more so that they would be sufficiently gullible to take their advice - or just sign on the dotted line and "I'll handle it all for you".
adbob
1st May 2017
4:52pm
BTW - get ready for that 5 year gifting rule to tighten up once more than a few people start using it. Dosh in the Cayman Islands - rich farmer family trust arrangements etc (ie friends of the LNP - the few they have left) you should be OK though.
niemakawa
1st May 2017
6:49pm
@adbob, a few nights at the casino will rid you of the surplus. Have fun what the hell!!!!!!!!!!!
Rosret
2nd May 2017
8:04am
Adbob the gifting has been going on for decades. If you want the government pennies a little more thought and planning needs to go into the gift giving schedule.
Remember once money is given to children many see it as theirs not as your pension supplement. I see it all the time.
You may think your children are loving and caring but most legal money issues are between family partnerships, execution of Wills etc and you have no legal recourse if you choose to do this to get a pension.
Its so much easier to let your super fund give you a healthy investment return and live honestly - so much less of a heart ache.
adbob
2nd May 2017
9:18am
@Rosret

Former UK Chancellor of the Exchequer Roy Jenkins described death duties as:" A voluntary charge paid only by those who distrust their offspring more than they dislike the Inland Revenue".

Chancellor of the Exchequer = treasurer here)
Inland Revenue =ATO here
Oldman Roo
1st May 2017
5:48pm
I find the Centrelink regulations rather strange on house 1 and house 2 .
Unless I am the only one in the situation , which I doubt , I would have to sell the house I live in first to have enough funds to buy another . Centrelink rules appear to be applying with the unlikely reverse situation and they can not seriously expect that advanced age people live in a tent somewhere or rent and go through the difficult procedures selling house one , the strain of moving from house one to temporary accommodation and go through it all again when the proceeds from the sale of house one become available .
I would appreciate advice from people familiar with Centrelink regulation in my situation .
Oldman Roo
1st May 2017
6:09pm
I forgot to point out that I can only see one solution ,which is purchasing house 2 on bridging finance ,move in and put house one on the market .
What are Centrelink rules on this scenario ?
Rosret
2nd May 2017
8:18am
A tent. hehe
Have you been to a caravan park lately - not cheap!
niemakawa
1st May 2017
6:59pm
When you sell a home Centrelink will need to see a settlement statement of the net sale proceeds with a copy of your bank statement/deposit showing the amount. Yes it is quarantined form the assets test for 1 year ( or maybe longer) but deeming rates apply to the balance in your account. Likewise when you buy again Centrelink will more than likely want to see evidence of the purchase, outgoings and bank statements/receipts. Say you sell for 500,000 and buy another property for 250,000 ( all net amounts) then Centrelink will surely include the difference in both the assets and income tests. If your bank account balance after the purchase say is only 100,000 , then expect questions to be asked about what you have done with the "missing" 150,000.
Rosret
2nd May 2017
8:14am
Is that your suggestion or fact?
I think what has changed with the new generation of retirees is the access to the lump sum. It always was an option however it was far more advantageous to be on the perpetual income stream.
Now nothing is guaranteed and there is an end date to the financial kitty hence the baby boomers extensively buying investment properties so they do have money in their 90s.

Also, re upgrading - I can give one example where an individual's country cottage was no longer suitable and they must return to a place closer to town on less acreage and it will cost more to buy.
So not everything is that straight forward.
niemakawa
3rd May 2017
5:09pm
You can check with Centrelink if there is any doubt in your mind.


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