You’ve just retired, the children have left home, your family home feels too big, and your savings are inadequate. Is it time to sell, downsize and contribute the difference to super?
Climbing the stairs and mowing lawns at your large ‘empty nest’ family home are wearing thin. Your retirement savings could also do with a boost. Maybe you still have a mortgage. You wonder if you should sell, move to a smaller house or apartment and contribute any difference to super.
The attraction of getting money into super is that investment earnings on money in a super fund are generally taxed at 15%, representing a potential tax saving of up to 31.5%. This is because when you hold an investment outside super, the earnings are generally taxed at your marginal tax rate which could be up to 46.5%.
After age 60 and once you’ve satisfied a ‘condition of release’ (such as retirement), any withdrawals from your super are tax free. If you use your super savings to start a pension, there’s no tax on the earnings within super on that capital. This makes it very attractive to get money into super while you can still contribute.
If you sell an investment/asset like your home and contribute some of the proceeds to your superannuation fund, then you’re making what’s known as an after tax contribution.
The cap for after tax contributions is $150,000 a year or you can make a one-off contribution of $450,000 every three years if you’re under age 65.
Between the ages of 65-75 you can still contribute to superannuation but you need to satisfy a work test where you prove you’ve worked 40 hours over 30 consecutive days during the financial year. This may involve some casual work.
Between the ages of 65-75 you can still contribute to superannuation but you need to satisfy a work test where you prove you’ve worked 40 hours over 30 consecutive days during the financial year. This may involve some casual work.
Given that it’s your home (ie, your principal place of residence) you are selling to make a contribution to super, then generally CGT shouldn’t apply.
Social Security implicationsIf you’ve already retired, then the funds from your house sale which you contribute to superannuation will be counted by Centrelink if you’re getting a full or a part Age Pension.
If you decide to invest the funds outside superannuation instead then they would be subject to deeming, that is, they would be deemed to have earned a certain investment return which would be counted for Centrelink purposes.
However, you can still receive a Part Age Pension as a home owner couple if your assessable assets are under $1,092,000 (excludes your family home) and your income is under $2,713.60 per fortnight. Remember, both an income and assets test is applied. The test which calculates the lower pension determines your entitlement.
Possible means test exemption comingIn the 2013 Federal Budget, the Government announced a scheme to help older people downsize their home to one more appropriate for their needs – without affecting their Age Pension entitlements.
The Budget papers stated:
“From 1 July, 2014, senior Australian homeowners who have owned their family home for at least 25 years and who decide to downsize will have the option to invest in surplus funds (up to $200,000) in an account. The funds invested in the account and earned interest, will be exempt from the Age Pension means test for up to 10 years.”
However, with this year’s Federal Election, this policy, along with many other policies/promises, may be shelved or amended. Watch this space.
Stamp dutyThere are no special stamp duty concessions for people who decide to purchase a smaller property as part of a downsizing exercise to help fund their retirement.
General lifestyle and financial considerationsWhile it may sound like a simple financial solution to sell the family home for extra cash to add to your superannuation, there are other issues you should consider.
These include whether you can find an alternative house or apartment that meets your needs and frees up enough cash to make the move worthwhile. Sometimes, if you’re looking in the same suburb/area in capital cities, you may find there’s not much difference in what you get for an older family home versus the price of a new apartment in a nice complex with a lift, underground parking and/or concierge, not to mention the quarterly strata levies you’ll be forking out for. Do your sums.
If you’re moving somewhere completely different, consider renting there first to decide whether the lifestyle and people suit you.
Also consider transaction costs. You’ll have to pay stamp duty to buy a new home/apartment so you should decide on your likely purchase price for a proposed new home then use a stamp duty calculator to estimate what stamp duty would be payable on that price to get your true purchase price.
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