Considering downsizing?

Want to unlock some of the equity in your home to boost your retirement income? If you’re retired or planning on retiring soon, you may have thought about downsizing – selling your family home and moving to a smaller place. What do you need to consider before making the move?

What time is right to downsize?

There are a number of scenarios that might get you thinking about downsizing. For some people it will be a lifestyle choice, freeing up some cash and having less maintenance to take care of, for others it will be a necessity if they find themselves unable to manage a house alone or for health reasons.

When you’re starting to think about, or have recently retired, it’s a good time to start considering this option. You’ll have a good idea of what cashflow you’ll have in the years to come, and will also have time to research your new home. And, if it’s the first time you’ve moved in a while it may take some time to prepare mentally, cull your belongings and pack!

What will it mean financially?

Firstly, to qualify to make a downsizer contribution you’ll need to be age 65 or over, and the property you’re selling to downsize is currently, or was at some point previously, your main home. If you fit into these criteria (along with a few others – see below) and downsize, you’ll be able to contribute up to $300,000 to your super and if you have a spouse, you can contribute up to $300,000 each.

Remember, you can keep contributing to your super to age 75, but after age 67 you’ll need to satisfy a work test1 (visit ato.gov.au for more details).

What you need to consider

There are a number of important things about downsizer contributions that you should know.

  1. You don’t have to buy a smaller house or even another property with the proceeds of the sale to make a downsizer contribution.
  2. Downsizer contributions do not count towards other super contributions caps.
  3. Your downsizer contribution amount cannot exceed the total proceeds of the sale of your home.
  4. You can make a downsizer contribution to super even if your total super balance is more than $1.6 million2, however any downsizer contributions you make will count towards your total super balance in future financial years.
  5. Downsizer contributions count towards your $1.6 million transfer balance cap2 which limits the amount that can be transferred into retirement pensions.
  6. You cannot claim a tax deduction for downsizer contributions.

You’ll also need to provide your super fund with a downsizer contribution form either before or at the time you make the contribution (if you make multiple contributions, you’ll need to provide multiple forms).

Are you eligible to make a downsizer contribution?

You’ll have to tick all of the boxes below to be eligible for downsizer contributions.

  • You’re at least 65 years of age at the time you make the contribution (there is no cut off age).
  • The property you sell is, or was at some point in the past, your principal home.
  • You, your spouse or former spouse have owned the home for 10 years or more prior to the sale.
  • Your home is in Australia and is not a mobile home (e.g. caravan or house boat).
  • The amount you’re contributing must be from the sale proceeds of your home.
  • The contribution is made within 90 days of receiving the sale proceeds (usually the date of settlement).
  • You can only make downsizer contributions from the sale of one home.

The proceeds of the sale of your home must also be either exempt, or partially exempt from capital gains tax under the main residence exemption (or would be entitled to such an exemption).

As you can see, there are a number of eligibility requirements so make sure you get independent financial and/or legal advice before making the decision to downsize.


Examples of how downsizer contributions work

Joe and Mary are age 67. They decide to downsize and sell their family home for $550,000. As their total downsizer contribution can’t exceed the total proceeds of the sale, they decide to split the contributions – Mary contributes $300,000 and Joe $250,000.

If however Joe was aged under 65, he wouldn’t be eligible to make a downsizer contribution and Mary could only contribute the maximum of $300,000. However, Joe still may be able to make a personal contribution to his super if eligibility conditions are met.

 

Pamela is 73, her spouse has passed away and she has decided to sell the home where they had lived for over 10 years and move into a smaller property. The property sells for $1.3 million. Pamela contributes $300,000 as this is the maximum downsizer contribution per individual.

A number of years later Pamela sells the property where she has been living to fund her aged care. Pamela is not eligible to make a downsizer contribution from this sale as she has already made a downsizer payment from the sale of her previous home.


Note:
Examples assume all eligibility criteria is met.


Aged care and downsizing

As you get older and may need to consider moving into an aged care arrangement, downsizing is one of the options you have to fund this phase of your retirement. If you’re single and moving into an aged care facility, you’ll need funds for your lump sum Refundable Accommodation Deposit (RAD) or the equivalent Daily Accommodation Payment (DAP). Freeing up cash from the sale of your home is an option, and as your home is included in your assets test for aged care assessments (up to a capped amount), a home of a higher value may impact government contributions towards your aged care costs. You could also consider renting your home to help cover required payments without needing to sell your home (which could continue to appreciate) but this may impact any Age Pension entitlements you receive.

If you’re in a partnership where only one of you needs aged care, your home is exempt from being considered as an asset while your partner continues to live there.

Just like planning for retirement, aged care is a complex area, and thinking about it before you need it can reduce the emotional pressure on your family, and allow you to set up your finances to put you and your health first.

Where to get advice

There are a lot of considerations and options when it comes to downsizing and aged care (together or separately), so make sure you do your research before making any decisions. If you’d like some advice to help navigate your situation, your EISS Super financial planner can offer advice tailored to you or your loved one’s situation.

To arrange an appointment please speak to your financial planner or call us on 02 9046 1920.


1 To meet the work test you must be aged 67 and employed or self-employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which the contribution is made.
2 Your total superannuation balance for a financial year is the total value of all of your superannuation and income stream accounts as at 30 June of the previous financial year. If it’s more than $1.6 million, then you cannot make any non-concessional contributions into super. Note: From 1 July 2021 the transfer cap will increase to $1.7 million for individuals where no super has been transferred into a retirement phase income. Everyone will have a cap of between $1.6 - $1.7 million depending on their situation.