There’s an art to down­siz­ing

The Weekly Advertiser Horsham - - 2017 In Pictures -

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.

Tax-free gain

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 in­ter­na­tional hol­i­day.

But be­fore you get too ex­cited by your po­ten­tial wind­fall, re­mem­ber to take into ac­count ex­penses such as agent 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. 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 might be sub­ject to CGT.

On the up­side, down­siz­ing might re­duce your liv­ing costs. New homes are usu­ally more en­ergy ef­fi­cient and cost less to heat and cool than older hous­ing stock.

Cen­tre­link con­sid­er­a­tions

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 might 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 be­cause it in­creases the risk of be­ing caught in the ‘as­set rich, cash poor’ trap.

Super boost

As an in­cen­tive to down­size, the Fed­eral Govern­ment has pro­posed that from July 2018 Aus- tralians aged over 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 might also be a de­sir­able destination for most of the money freed up by down­siz­ing. Make sure that any con­tri­bu­tions fall within the rel­e­vant lim­its.

Emo­tional cost

While the fi­nan­cial ben­e­fits of down­siz­ing can be con­sid­er­able, mov­ing house is among 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 might 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 di­men­sions, and you’ll want to make the most of any prof­its you re­alise.

Talk to your fi­nan­cial ad­viser be­fore you get in with the real es­tate agent. 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.

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