Making decisions about retirement can be tricky for a lot of us. Where do you want to retire, what age should you retire, should you think about downsizing – there’s a lot to consider.
If you own your home and are considering selling to boost your retirement nest egg, there’s an extra element to think about, when is the best time to sell – before or after retirement?
Of course, whether you decide to sell your home or maybe an investment property before or after you retire will depend on your own needs and circumstances. You may want to release the value in your home by selling and buying a less expensive place that costs less to maintain. The sale proceeds or reduced expenses might help your retirement income last longer or you could use any leftover money to invest, travel or buy that new car you’ve been wanting.
There are also a number of practical reasons which may make selling your home the best decision for your retirement. Maybe you want to be closer to family, live in a more affordable neighbourhood, or even cut down on housework and enjoy your retirement doing the things you love.
Thinking ahead and speaking with a financial adviser can help you make the most of your opportunities and avoid any unexpected financial implications that may affect your tax obligations and Age Pension entitlements.
To get you prepared for this decision, here are a few things you should think about when considering the right time to sell your home.
There are a number of taxes to consider when selling your home. It is important to note when you sell the home you live in, the proceeds from the sale will generally not be assessed as a capital gain so capital gains tax won’t apply.
However, when you sell an investment property tax will apply to 50% of the profit; providing you’ve held the property for at least 12 months. If you’ve owned the property for less than 12 months, tax will apply to 100% of the profit. This is important to consider in the timing of selling your property; mapping out your property value and taxes that apply will help you get a better understanding of the overall profit you can hope to gain from selling your property/properties on the brink of retirement.
You may be able to save tax by investing some, or all, of the proceeds of the sale of your house in super before and after you retire.
Depending on your age you may be able to take advantage of the non-concessional super contributions cap, which allows you to make after-tax contributions of up to $300,000 over three years. If you’re under 65, you can invest $300,000 in one lump sum if you use the bring-forward rule which allows you to invest three years’ after-tax contributions in one year.
There is also an eligibility test to contribute to super from age 65 up to 74, where you need to have worked at least 40 hours over no more than 30 days.
Even better, if you wait until July 2018, the Government is hoping to introduce downsizer contributions, where taxpayers can apply up to $300,000 from the proceeds of the sale of their home as a super contribution. This contribution can be made regardless of the work test and will not be counted towards your non-concessional limit. However, the contribution can only be made if the beneficiary is over 65 and will count towards the superannuation pension caps.
Investing the money in super can be a tax-effective option, as after you turn 60 any payments from your super are tax free. And if you start a pension using your super, the earnings generated by your super pension investments are also tax free. This could present a great opportunity to boost your retirement savings in your last few years of working.
Another consideration is how the sale of your home may affect your Age Pension entitlements under the assets test and, depending on how you invest the proceeds or even if you rent out part of your home, the income could be tested too. If you’re downsizing, for example, you may have an increase in your assessable assets as the difference between the sale price and the purchase of the new home will now be assessable and could impact your pension entitlement. You can find out more from the Department of Human Services.
Similarly, if you are selling your investment property, the money released from the sale will also be assessed under the age pension assets test.
Furthermore, depending on where you invest the proceeds from the sale of your home (or investment property) a deemed amount of income may be assessed under the income test.
It’s worth considering the implications of each of your options before you sell. Talk with a financial adviser and use a home and retirement planner to get an idea of how much you could end up with and how your property could fit into your retirement plans.
Additionally, it is important to consider the lifestyle impact moving house may have on you and your partner. Consider house swaps or house-sitting in the area you are looking to retire in before committing to a full move. This time would allow you to explore the area, make social contacts and see if it is ultimately the kind of lifestyle you want for your retirement.
Anthony Jones is an authorised representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.