If you’re considering selling your family home to downsize or move into aged care, there’s a crucial Centrelink rule you need to understand before making any decisions. This special provision could significantly impact your Age Pension eligibility, and many Australian retirees aren’t aware of how it works.
Understanding the Downsizing Rule That’s Catching Retirees Off Guard
When you sell your principal residence and have money left over after purchasing your new home, Centrelink has specific rules about how these funds affect your pension eligibility. The good news is that there’s actually a protective measure in place – but it comes with important time limits and conditions.
Services Australia community services officer Justin Bott explains that when you sell your principal home and immediately use the money to buy a new place to live, any leftover funds will be assessed under standard income and assets tests. However, there’s a different arrangement for people who have sold their home but are still looking for the perfect place to buy or waiting to build.
The Two-Year Grace Period Explained !
Since January 1, 2025, retirees who sell their principal residence have a two-year grace period before leftover funds are fully counted as assets. This means you can “park” this money in an appropriate account, and it won’t be included in any assets assessment for your Age Pension eligibility during this period.
Here’s how it works in practice: Let’s say Margaret sells her family home for $900,000 and plans to buy a retirement village unit for $600,000. The remaining $300,000 won’t be counted in her assets test for two full years, giving her time to make her purchase without losing pension eligibility immediately.
How the Income Test Still Applies During This Period
While your leftover funds might be exempt from the assets test during the two-year period, they’re still subject to income testing through what’s called “deeming.” Centrelink assumes your money is earning a return, even if it’s sitting in a low-interest account.
The current lower deeming rate is 0.25%, which means if you have $300,000 waiting to be used for your new home, Centrelink will add $750 per year (or about $29 per fortnight) to your income test calculation. This is significantly better than being assessed on the full amount as an asset.
Real-World Example: How the Numbers Work
Take David’s situation: He sold his home for $1.2 million and bought a smaller place for $800,000, leaving him with $400,000. Under the current rules:
- The $400,000 is exempt from the assets test for two years
- For income testing, it’s deemed to earn 0.25% annually ($1,000 per year)
- This adds roughly $38 per fortnight to his income test
- His pension reduction would be minimal compared to having the full amount counted as an asset
Critical Restrictions You Must Know About !
This special rule only applies to funds from selling your principal place of residence. It doesn’t work for:
- Investment property sales
- Holiday home sales
- Second property sales
Additionally, you must genuinely intend to use the money to purchase, build, or renovate another home to live in. Centrelink takes this intention seriously, and you’ll need to demonstrate your plans.
What Happens After Two Years?
If you haven’t used the funds to purchase your new home within two years, the money will be fully assessed under normal assets and income tests. For many retirees, this could mean:
- Significant reduction in Age Pension payments
- Potential loss of concession cards
- Impact on other Centrelink benefits
This is why planning ahead is absolutely essential.
The $300,000 Super Strategy Alternative
Many financial advisors recommend considering the downsizer super contribution as an alternative strategy. If you’re 55 or older, you can contribute up to $300,000 from your home sale directly into superannuation. For couples, that’s up to $600,000 combined.
Benefits of this approach include:
- Keeping money in the tax-advantaged super environment
- Reducing assessable assets for pension purposes
- Maintaining some access to funds in retirement phase
- No impact on super contribution caps
Combining Strategies for Maximum Benefit
Smart retirees often use a combination approach:
- Put $300,000 (or less) into super as a downsizer contribution
- Use the two-year exemption period for remaining funds
- Carefully time the purchase of their new home
- Seek professional advice to optimize their position
Getting the Timing Right !
The key to making this rule work in your favor is timing. Here’s what financial experts recommend:
Before You Sell:
- Calculate exactly how much you’ll have left over
- Understand current asset and income limits for your situation
- Consider whether downsizer super contributions make sense
- Get a clear plan for your new home purchase
After You Sell:
- Inform Centrelink within 14 days of settlement
- Set up appropriate accounts for your funds
- Keep detailed records of your home-buying intentions
- Monitor the two-year deadline carefully
Common Mistakes to Avoid
Many retirees make costly errors when navigating this rule:
- Not informing Centrelink promptly about the sale
- Assuming the exemption lasts forever
- Using exempt funds for purposes other than home purchase
- Not seeking professional advice before making decisions
Why This Rule Exists and Why It Matters
This special provision recognizes that selling and buying property takes time, especially for older Australians who may need to research retirement villages, arrange aged care, or find suitable accessible housing. Without this protection, many retirees would face immediate pension cuts simply for being between homes.
However, the rule also reflects the government’s position that housing wealth should generally be counted when assessing pension eligibility. The two-year period is designed to be a reasonable transition time, not a permanent exemption.
Planning for Success
If you’re considering downsizing, start planning well before you put your house on the market. The most successful outcomes happen when retirees:
- Understand the rules thoroughly
- Have realistic timelines for finding new accommodation
- Consider all their options, including staying put
- Get professional financial and legal advice
- Keep detailed records throughout the process
Remember, downsizing isn’t right for everyone. While it can free up capital and reduce maintenance responsibilities, it also involves significant costs (like stamp duty), emotional adjustments, and potential impacts on your pension. Take time to weigh all factors carefully.
The Centrelink downsizing rule can be a helpful bridge during your transition, but it’s not a magic solution. Understanding how it works and planning accordingly will help you make the best decision for your circumstances and avoid any unwelcome surprises with your pension payments.
If you’re unsure about how these rules might affect your specific situation, Services Australia offers free Financial Information Service consultations to help you understand your options and plan your next steps.
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