Downsizing explained: costs, super, the pension and timing

Downsizing usually means selling the family home and moving to something smaller: a unit, a villa, a smaller house, or a home in a seniors community. It doesn’t have to mean less. For many people it means less cleaning, less garden and fewer stairs, and more time for the things they enjoy.

The reasons are different for everyone. Some want to be nearer to grandchildren, a hospital or the shops. Some are tired of maintaining a big block. Some want to free up money for retirement. Some have lost a partner and the house feels too big.

Downsizing isn’t the only answer. Plenty of people stay put and bring help in. But if you’re thinking about it, it’s worth looking at clearly, with real numbers.

A common surprise is how little money is left over once the costs are paid. If you sell and buy in the same area, the price difference between a big house and a smaller one may be smaller than you think, and new, well-designed smaller homes can cost as much as the old family home.

Add up these costs before you decide. Ask for written quotes where you can.

• Selling: the agent’s commission (usually a percentage of the sale price), advertising, and any repairs or styling to get the home ready.
• Legal work: a solicitor or conveyancer for both the sale and the purchase.
• Stamp duty: a state tax on the home you buy (see the next section).
• Moving: removalists, packing, storage, and the cost of clearing out what you don’t take.
• Ongoing costs: if you move to a unit or townhouse, there are usually strata or body corporate fees. Council rates, insurance and utilities may also change.
• Setting up: new furniture that fits the smaller space, curtains, or changes like grab rails.

Stamp duty, also called transfer duty, is a tax you pay when you buy property. It’s set by each state and is worked out on the price of the home. On a typical home it can run to many thousands of dollars, so it matters.

In Queensland, if you’re buying a home you will live in, you may be able to claim the home concession, which lowers the duty. There are conditions, such as moving in within a year of settlement and not selling or leasing out the whole home within a year of moving in. The Queensland Revenue Office has a calculator and an eligibility tester.

In New South Wales, the main concessions are for first home buyers and a few specific situations. At the time of writing, neither state had a general stamp duty concession for seniors or pensioners who are downsizing, although governments do change these rules. Check with Revenue NSW or the Queensland Revenue Office, and ask your solicitor or conveyancer, before you sign.

The downsizer contribution lets older Australians put money from the sale of their home into super. According to the Australian Taxation Office (ATO), you can contribute up to $300,000 each, and couples can contribute up to $300,000 each, as long as the total isn’t more than the sale proceeds. It doesn’t count towards the usual caps on how much you can add to super.

You must meet all of the ATO’s conditions. These include:

• You’re 55 or older when you make the contribution.
• You or your spouse owned the home for 10 years or more before the sale.
• The home is in Australia, and it isn’t a caravan, houseboat or mobile home.
• The sale qualifies, at least partly, for the main residence capital gains tax exemption (or would have, for homes bought before 20 September 1985).
• You haven’t made a downsizer contribution before.
• You give your super fund the Downsizer contribution into super form before or when you contribute.
• You contribute within 90 days of getting the sale money, usually at settlement, unless the ATO gives you more time.

It can be a useful way to move money into a tax-friendly setting. But it isn’t automatic that it helps you. Money in super counts towards your total super balance, which can affect some other super rules. And the ATO notes that selling your home and making a downsizer contribution may affect income support payments such as the Age Pension.

That’s because your home isn’t counted in the Age Pension assets test, but money in super generally is once you reach Age Pension age. Moving wealth from your house into super, or into the bank, can reduce or stop your pension.

This is a decision where personal advice really helps. The Financial Information Service at Services Australia is free and can explain how the rules apply to you. A licensed financial adviser can give advice for your situation.

While you live in it, your home (and up to 2 hectares of land on the same title) isn’t counted in the Age Pension assets test. Once you sell, the money becomes an asset, unless an exemption applies.

Services Australia says that for homes sold from 1 January 2023, the part of the sale money you plan to use to buy, build or renovate your next home can be left out of the assets test for up to 24 months. In some cases you can get up to 12 more months, to a maximum of 36. That money is deemed (assumed to earn income) at the lower deeming rate. Any money you don’t plan to put into your next home is assessed in the usual way.

If you buy a cheaper home and keep the difference, that extra money will usually count. You must tell Centrelink about changes to your real estate, including selling, within 14 days.

The home you move to could be your home for 20 years or more. Choose it for the person you’ll be at 85, not only the person you are now.

Think about what would happen if you couldn’t drive, or if walking became harder. A home that suits you now but has steep steps and no bus stop could force a second move later.

• Single level, or a lift, with few steps at the entrance.
• A walk-in shower, or a bathroom that could easily be changed.
• Wide doorways and hallways, and room for a walking frame.
• Close to shops, a GP, a pharmacy and public transport.
• Near family, friends or community groups you value.
• A small, easy garden, or a balcony if gardening matters to you.
• If it’s strata, check the fees, the building’s condition and any by-laws about pets or changes.

There’s rarely a perfect moment. But moving is physically and emotionally hard work, and it’s much easier while you’re well and can make the choices yourself. When a move happens after a fall or a hospital stay, decisions are rushed and options narrow.

Kindly blunt: it’s easier to move a year early than a year too late.

Think about the order, too. Buying before you sell means paying for two homes for a while. Selling first can mean renting or staying with family in between. A solicitor or conveyancer can help you line up settlement dates. Give yourself time to sort your belongings well before moving day.