By the time you start considering retirement you may have substantial equity in your home. You may even own your house outright. Selling the family home is one way to free up cash for retirement. The money you receive can be invested in shares, term deposits, managed funds or superannuation.
In addition to finding a place to live, there are many financial, practical and emotional factors to consider before downsizing your home.
Your Age Pension entitlement depends on the value of your assets (the assets test) and the income you receive (the income test). Selling your home may affect the amount of Age Pension that you receive.
Your home and the two hectares surrounding it are not counted under the assets test. If you sell your home, the proceeds will be exempt from the assets test for up to 12 months, as long as you are planning to use the money to buy another home. The proceeds, however, will be deemed under the income test.
Susan is 69 and divorced. She decides to sell the family home after her last adult child moves out because it is too big. She expects to sell the home for $900,000, buy a cheaper apartment closer to the city for $600,000, and have $300,000 left to invest.
Before she puts her house on the market, she goes to Centrelink and asks how the sale will affect her Age Pension. The Financial Information Service officer tells her that the $300,000 will be counted towards the assets test for her Age Pension. Even though this will reduce the amount of Age Pension that she receives every fortnight, Susan decides that she is still better off downsizing.
Alternatives to downsizing
Selling the home where your children were raised and leaving behind neighbours and friends can be difficult and stressful. Add to that the challenges of relocating to a new area, moving into a smaller space and making new friends and, suddenly, staying put might seem like a good idea.
Here are some possible alternatives to selling your home:
- Converting your home to dual occupancy so you can live in one half and rent or sell the other half
- Renting out some rooms through Airbnb; however, this has tax implications and may affect your Age Pension, so seek financial advice before you proceed
- Considering accessing the equity in your home – but make sure you understand the long-term risks
- The Pension Loan Scheme is being revised and additional income up to 150 per cent of the Age Pension can be used as an alternative income stream instead of a reverse mortgage.
If you intend to stay in your house for the long term, you may want to renovate your home so that it’s safe and easier to move around as you get older. The My Aged Care website has information on getting help to stay in your own home so you can maintain your independence for longer.
What to do with your extra funds
After you’ve sold your house, you may have money to invest in other income-producing assets. There are lots of options available, so seek financial advice on the best mix of investment products for your needs.
Downsizing into superannuation
In the May 2017 budget, the Government announced that from 1 July 2018, if you are aged 65 or over and sell the principal residence that you have owned for at least 10 years, you will be able to make a non-concessional contribution to super of up to $300,000 from the proceeds. Couples will be able to contribute $300,000 each.
Non-concessional super contributions are payments you put into your super from your savings or from income you have already paid tax on. They are not taxed when they are received by your super fund.
The contribution will not count towards the non-concessional contribution cap or the $1.6 million balance test, and you will not need to meet the existing maximum age or work test rules.
You can only make downsizing contributions for the sale of one home. You can’t access it again for the sale of a second home.
Eligibility for the downsizer measure
You will be eligible to make a downsizer contribution to super if you can answer yes to all of the following:
- you are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit)
- the amount you are contributing is from the proceeds of selling your home where the contract of sale exchanged was on or after 1 July 2018
- your home was owned by you or your spouse for 10 years or more prior to the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale
- your home is in Australia and is not a caravan, houseboat or other mobile home
- the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT (acquired before 20 September 1985) asset
- you have provided your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution
- you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement
- you have not previously made a downsizer contribution to your super from the sale of another home.
Note: If the home that was sold was only owned by one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, or have one made on their behalf, provided they meet all of the other requirements.
Requesting an extension of time for downsizing contributions
You may be able to request a longer period for making a downsizer contribution in some circumstances, for example, where a delay has been caused by factors outside your control. An extension of time will not be granted to allow you to meet the age requirement.
An extension of time should be requested before the 90-day period from the date of settlement has expired.
However, if you have overlooked the 90-day time frame, an extension of time may be granted due to but not limited to:
- ill health
- death in the family
- moving house.
Gertrude is 75 and decides to sell her family home of 15 years. Settlement occurs on 1 April 2019. She purchases a new home in a retirement village which is due to settle on 1 June 2019.
The retirement village has only just been built and Gertrude’s settlement is delayed until 1 August 2019 while final council approvals are obtained.
Gertrude does not want to contribute funds from the sale to her super until after the settlement of her new property to ensure she has enough money to purchase and move into the property.
Upon her request, the Australian Taxation Office gives Gertrude an extension of time to contribute until 1 October 2019. This extension allows Gertrude enough time to settle on the new property and make a contribution of the remaining money from her sale.
Gertrude can afford to contribute the maximum $300,000 to her super fund after the sale and makes this on 24 September 2019.
What happens if your downsizer contribution is not eligible?
If the Australian Taxation office becomes aware that your contribution does not meet the downsizer contribution eligibility requirements, you will be notified and so will your super fund.
Once notified, your fund will assess whether your contribution could have been made as a personal contribution under the contributions acceptance rules.
If your contribution could be accepted, the amount will count towards the relevant contribution cap.
If your contribution can’t be accepted, the contribution amount will be returned to you by your super fund.
False and misleading penalties may be applied if the Australian Taxation Office identifies that your downsizer contribution was not eligible and you had incorrectly declared that you were eligible to make such a contribution.