Downsizing - why selling up may be a very bad move

The Federal Government has introduced new legislation that, from 1 July 1 2018, will enable eligible Australians to sell their home and put up to $300,000 of the proceeds into superannuation. Existing contribution limits will not apply.

 

By Tony Kaye, Eureka Report

 

Tread very carefully if you are considering doing this. While this measure will be financially beneficial for some, it will be detrimental for others.

 

Australia’s property market could get an unexpected volume boost from mid next year when the Federal Government’s new home downsizing scheme announced in the latest budget comes into effect.

 

That’s assuming a sizeable number of eligible Australians take up the option of selling their principal place of residence to buy a smaller home, with a view to injecting more money into their superannuation. Some will already be planning out their house sale. But doing so, without proper advice, could be a really bad financial move.

 

Firstly, here’s what the Government announced in the 2017 May Federal Budget as part of a series of initiatives aimed at freeing up housing stock across the country for upsizers and younger families.

 

From 1 July 2018, individuals aged 65 or over will be able to sell their principal place of residence if it has been held for a minimum of 10 years and deposit up to $300,000 of the proceeds into their superannuation account. Couples will be able to deposit up to $600,000.

 

The existing restrictions on voluntary contributions for people aged 65 and older, including the work test for those aged between 65 and 74 years old, and the ban on super contributions for those aged 75 and over, will not apply. Neither will the restrictions on making further non-concessional contributions for people with account balances above $1.6 million.

 

On the surface, the policy could be regarded as a win-win for retirees and those seeking out a home.

 

The Financial Services Council says it is supportive of the Government’s efforts to remove barriers to downsizing by enabling older Australians to downsize and contribute windfall gains from the sale of their home to superannuation without breaching super caps.

 

“Allowing retirees to downsize and contribute up to $300,000 to their superannuation accounts will free up much-needed supply in housing markets and help retirees monetise their largest asset – their home – to help fund their needs in retirement,” FSC chief executive Sally Loane told Eureka Report.

 

However, before heading down the pathway to downsizing your home, it’s very important to tally up both the raw costs and the potential risks. Depending on your circumstances, including where you live and where you intend to buy, and your total assets position, selling up and buying another property could become a decision you’ll later regret.

 

As well as the substantial costs associated with selling and buying a property, home downsizing will likely result in many individuals or couples losing part or all of their existing or future Age Pension entitlements. More on that further below.

 

The raw costs of moving

Moving homes is never cheap, but there’s a stark difference in selling and buying costs based on location, and what you sell and buy.

 

I’ve calculated the median costs of moving home in each of Australia’s eight capital cities, taking into account the general costs incurred when selling and buying.

 

Based on my calculations, Canberra is Australia’s cheapest downsizing capital for pensioners, with a median changeover cost of $23,497. That’s because pensioners pay virtually no stamp duty on property purchases in the Australian Capital Territory. Darwin is the only other capital city to apply a pensioner stamp duty discount, taking $10,000 off the governing rate.

 

No surprises that Sydney is the most expensive downsizing capital, with a median changeover cost of $59,416, followed by Melbourne with a median changeover cost of $52,243.

 

I’ve used the median prices for houses and units in all the major cities based on CoreLogic data, and assumed that most individuals or couples who take up the downsizing option will sell a larger house to buy a smaller unit. That’s what downsizing is meant to be about.

 

However, depending on which suburbs you are buying and selling in, the costs of downsizing may be much higher.

 

Total costs take into account the general costs of selling and buying, including fees, commissions and stamp duty. I’ve applied a standard real estate agents’ commission of 2.5 per cent and $5,000 for marketing. These costs can vary considerably.

 

I’ve also applied a standard conveyancing cost of $1,000 for both selling and buying. Again, this cost will vary. Typically, there are additional costs – mainly with selling a house – such as for pre-sale repairs and maintenance, and sometimes for staging furniture. These can easily add thousands more to the cost.

 

Selling costs on a house

Capital City

Median Price

Mortgage Fee

Transfer Fee

Agent Commission

Marketing Costs

Conveyancing Fee

Total Costs

Adelaide

$435,000

$160.00

$3,413.50

$10,875.00

$5,000.00

$1,000.00

$17,035.00

Brisbane

$530,000

$181.00

$1,371.00

$13,250.00

$5,000.00

$1,000.00

$20,802.00

Canberra

$633,000

$140.00

$372.00

$15,825.00

$5,000.00

$1,000.00

$22,337.00

Darwin

$518,500

$142.00

$142.00

$12,962.50

$5,000.00

$1,000.00

$19,246.00

Hobart

$385,500

$132.52

$203.05

$9,637.50

$5,000.00

$1,000.00

$15,973.07

Melbourne

$740,600

$114.90

$1,828.00

$18,515.00

$5,000.00

$1,000.00

$26,457.90

Perth

$505,000

$168.70

$278.70

$12,625.00

$5,000.00

$1,000.00

$19,072.40

Sydney

$950,000

$138.80

$138.80

$23,750.00

$5,000.00

$1,000.00

$30,027.60

Sources: CoreLogic, Agent commission based on 2.5% average. Marketing cost average.

 

Buying costs on a unit

Capital City

Median Price

Mortgage Fee

Conveyancing
Fee

Stamp Duty

Total Costs

Adelaide

$306,500

$160.00

$1,000.00

$18,080.00

$19,240.00

Brisbane

$391,250

$181.00

$1,000.00

$4,945.50

$5,126.50

Canberra *

$401,000

$140.00

$1,000.00

$20.00

$1,160.00

Darwin *

$362,000

$142.00

$1,000.00

$4,041.48

$5,183.48

Hobart

$290,250

$132.52

$1,000.00

$9,547.00

$10,679.52

Melbourne

$545,000

$114.90

$1,000.00

$24,670.00

$25,784.90

Perth

$400,000

$168.70

$1,000.00

$13,015.00

$14,183.70

Sydney

$728,000

$138.80

$1,000.00

$28,250.00

$29,388.80

Sources: CoreLogic, State Government stamp duty calculators. * Stamp duty discounts apply to pensioners in the ACT and Northern Territory.

 

The hidden pension trap

For individuals and couples with low superannuation balances, especially those receiving a part or full Age Pension, it’s important to tread very carefully when considering the Federal Government’s home downsizing scheme.

 

While it may seem a sensible strategy to inject more funds into superannuation to capture the benefits of tax-free income in pension phase, the end result could be financially disastrous.

 

Consider that the family home is exempt from the assets test used for calculating pension entitlements, while all other assets outside of the home including superannuation are taken into account. Average superannuation balances at retirement already put many Australians close to or over the pension assets test thresholds.

 

The thresholds were changed on 1 January this year to the limits in the table below. Any pension entitlements for individuals or couples are reduced by $3 per fortnight for every $1000 in assets above the new limits.

 

The Assets Test Limits

 

Homeowner

Not a Homeowner

Single

$250,000

$450,000

Couple

$375,000

$575,000

Source: Department of Human Services

 

The recent asset test changes have already led to some people moving around their financial assets so they can receive the pension, including directing more money into their tax-exempt family home. Downsizing their home would therefore be an illogical move for them.

 

The impact of the assets test thresholds in relation to the downsizing scheme will vary, based on how much net cash is realised in each property changeover. However, it’s probable that many singles and couples are likely to exceed the asset limits by selling a home and depositing additional funds into their super account, even after the costs of purchasing another residence.

 

As such, any tax savings on superannuation income earned in pension phase may be completely offset by the loss of pension entitlements and the costs of downsizing.

 

“People need to review their personal circumstances to determine if downsizing works for them,” Dr Martin Fahy, chief executive of the Association of Superannuation Funds Australia, told Eureka Report. “For some, downsizing may be involuntary and prompted by misfortune.

 

“It will be critical that people receive personal financial advice, especially with respect to social security means testing, as selling the primary residence (exempt asset) and contributing proceeds into superannuation (counted against the assets test) may reduce, or even remove, their entitlement to the Age Pension.”

 

Article courtesy of InvestSMART. See the original article at https://www.investsmart.com.au/investment-news/the-downsides-of-downsizing/141732

 

2 November 2017.