By Dennis Spiroski – Senior Financial Adviser
The kids have moved out. The house feels too big. Maybe you’re tired of the upkeep. Perhaps you’re thinking about coastal retirement or wanting to be closer to the grandkids. Or you’ve simply realised you’re sitting on substantial equity that could fund Your Great Life.
If downsizing is on your mind, you’re not alone. It’s one of the most common conversations we have with our empty nester clients.
But here’s the thing: downsizing isn’t just about square metres and postcodes. It’s a financial decision with serious implications for your tax, super, age pension eligibility, and ability to help your children.
Get it right, and downsizing can unlock significant funds for retirement, reduce your cost of living, and position you for the lifestyle you’ve earned. Get it wrong, and you could accidentally trigger a tax bill, lose age pension benefits, or create problems you didn’t see coming.
This is where strategic planning makes all the difference.
Downsizing Financial Considerations
The Downsizer Super Contribution: Your $300,000 Opportunity
If you’re 55 or over and you’ve owned your home for at least 10 years, you can contribute up to $300,000 per person ($600,000 per couple) from your sale proceeds into super.
This is called the downsizer contribution, and it’s powerful because:
- It doesn’t count towards your usual contribution caps
- You can do it even if your super balance exceeds $1.9 million
- You can do it even if you’re retired and no longer working
Once inside super, this money is taxed at just 15% on earnings, or 0% if you’re over 60 and in pension phase. Compare that to earning investment income in your personal name at marginal tax rates up to 47%.
Example: Margaret and John, both 62, sell their Hurstville home for $2.2 million and buy a smaller apartment in Brighton-Le-Sands for $1.1 million. They each contribute $300,000 to super using the downsizer contribution. That $600,000 will compound tax-effectively for the rest of their lives, rather than sitting in a bank account being taxed at their marginal rate.
Age Pension Implications: The Assets Test Trap
If you’re over 67 (or approaching it), downsizing decisions directly impact your age pension eligibility through the assets test.
The family home is exempt from the assets test, but cash and investments aren’t. When you sell a $1.5 million home and buy a $900,000 apartment, that $600,000 difference (after costs) suddenly counts as an assessable asset.
For couples, every $1,000 over the assets test threshold reduces your pension by $3 per fortnight. Depending on your other assets, this could reduce or eliminate your age pension entirely.
The opportunity: Using the downsizer super contribution moves money into super where it’s assessed more favourably for age pension purposes. Strategic timing of the sale, combined with super contributions, can preserve at least partial age pension benefits.
There’s also a 12-month exemption where sale proceeds don’t count towards the assets test if you’re planning to purchase another home. Understanding these rules and timing your decisions accordingly makes a substantial difference.
The Seniors Health Card: Don’t Accidentally Lose It
Many empty nesters hold a Commonwealth Seniors Health Card (CSHC), which provides pharmaceutical benefits and other concessions even if you’re not eligible for the age pension.
The card has an income test but no assets test. However, if your downsizing proceeds generate significant investment income, you could breach the income threshold and lose the card.
Strategic use of super contributions and tax-effective investments can keep your assessable income below the threshold while still providing the retirement income you need.
Helping Your Kids: Getting the Balance Right
One of the most common reasons empty nesters consider downsizing is to help their children financially – whether that’s a deposit for their first home, paying down their mortgage, or helping with grandchildren’s education.
Downsizing can free up capital to do this, but it needs careful planning to avoid creating problems.
We’ve written previously about helping your children financially without sacrificing Your Great Life and tax-savvy gifting strategies for business owners.
Key considerations:
Centrelink implications: Gifting more than $10,000 in a financial year (or $30,000 over five years) affects your age pension for five years.
Relationship protection: If you’re gifting substantial amounts to a child in a relationship, consider whether loan structures or other protections make sense if that relationship ends.
Equalisation between children: Helping one child more than others can create family tension. Clear communication and documentation prevents misunderstandings.
Your own security first: Don’t compromise your retirement security to help adult children.
Capital Gains Tax: Your Main Residence Exemption
The family home is generally exempt from capital gains tax, but there are traps for empty nesters.
If you’ve used part of your home to produce income (like renting out rooms), if you’ve been absent from the property for extended periods, or if you own the property through a trust or company rather than personally, you may have partial CGT exposure.
The six-year absence rule: If you’ve moved out of your home and rented it out, you can treat it as your main residence for up to six years. This matters if you’re considering renting out the family home temporarily before selling, or if you’ve already moved elsewhere and are now selling.
Timing matters: If you’re selling one property and buying another, the order of transactions and timing can impact which property qualifies for the main residence exemption during overlapping ownership periods.
The Real Costs You Need to Factor In
Empty nesters often focus on sale and purchase prices without properly accounting for transaction costs.
When selling: Agent commissions (typically 1.5-2.5% in Sydney), marketing, legal fees, and repairs before sale.
When buying: Stamp duty (significant in NSW), conveyancing, inspections, and moving costs.
Example: Selling an $1.8 million home might cost $50,000-60,000. Buying a $1.2 million apartment might cost $50,000-60,000 in stamp duty alone, plus another $10,000-15,000 in other costs. Your $600,000 in freed-up equity is suddenly closer to $480,000.
Understanding true net proceeds after all costs is essential for realistic planning.
Debt-Free Isn’t Always the Goal
Many empty nesters assume downsizing means paying cash for a smaller property and banking the difference. Sometimes that makes sense. Other times, keeping some mortgage debt and investing the freed-up capital provides better returns.
The question isn’t “should we be debt-free?” It’s “what’s the optimal use of our capital given our age and goals?”
This is especially relevant if you’re using the downsizer super contribution, where investment earnings are taxed at 15% or 0% in pension phase.
The Upgrade Trap
Some people sell thinking they’ll downsize, then fall in love with a premium apartment or coastal property that costs more than their original home.
There’s nothing wrong with upgrading if that’s your genuine goal and you can afford it. The problem is when people tell themselves they’re downsizing to free up capital, then spend more than expected and end up with less financial flexibility.
Reality check questions:
- What are we actually trying to achieve? Lifestyle change, capital release, or both?
- Are we being realistic about property costs in our target area?
- Have we factored in all transaction costs?
Getting the Timing Right
One of the biggest mistakes is treating downsizing as a single decision when it’s actually a sequence of interconnected choices.
Trying to figure out super contributions, age pension implications, and tax strategy in the three months between sale and purchase creates rushed decisions and missed opportunities.
Better approach:
- 12-18 months before: Review your goals, model different scenarios, understand implications
- Sale year: Coordinate super contributions, manage age pension timing, structure any gifts to children
- After purchase: Structure investments for freed-up capital
Why You Need Coordinated Advice
Downsizing decisions involve multiple moving parts: super strategy, age pension planning, tax implications, and potentially lending decisions.
These elements need to work together. Your super contribution strategy should align with your age pension planning. Your settlement timing should coordinate with your tax position. Your debt structure should support your retirement income plan.
At Navigate Advisory, we coordinate all these elements because we provide financial planning, accounting, and lending under one roof. You’re not juggling separate advisers who don’t talk to each other – you have one team working towards Your Great Life.
Because when your whole financial world makes sense, you gain the power to say ‘yes’ to bold life choices – including the choice to right-size your home for this next chapter.
Ready to explore whether downsizing makes sense for Your Great Life?
Book an introductory chat at navigateadvisory.com.au/contact/
Navigate Advisory has offices in Balmain, Brighton-Le-Sands and Hurlstone Park.
————
Downsizing for Empty Nesters: Common Questions
Any advice provided in this article is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making any decisions.