Selling the family home in retirement: CGT, Centrelink, downsizer, and replacement

Selling the family home is one of the most financially consequential decisions in retirement — and one of the most complex, because it sits at the intersection of at least four separate Australian financial and tax frameworks: the CGT main residence exemption, the Centrelink asset test treatment of sale proceeds, the downsizer super contribution rules, and the specific treatment of wherever the proceeds end up next. Done with preparation, a home sale in retirement can substantially improve the financial position; done without it, the same transaction can produce costly surprises. This article works through the key components.

How does the CGT main residence exemption apply?

For most retirees selling their long-term family home, capital gains tax is not the issue — the main residence exemption in Division 118-B of the Income Tax Assessment Act 1997 eliminates the CGT on the sale of a property that has been the owner's main residence throughout the period of ownership. The gain is simply not assessable. For a home bought 30 years ago for $150,000 and sold today for $1.5 million, the potential gain is substantial, and the value of the exemption is correspondingly large.

The exemption applies cleanly in most cases. The situations where it does not apply fully require attention. If the home has been partially used to produce assessable income — rented out for a period, used for a home business beyond a modest study, or used to generate substantial Airbnb income — a partial exemption applies based on the proportion of time or floor area used for income production. If the property was held by a company or family trust rather than in the owner's personal name, the main residence exemption does not apply — only individuals can access it. And if the person has become a non-resident for Australian tax purposes before the sale, different and less favourable rules apply. For most retirees selling a personally-held home they have continuously lived in, the exemption applies in full and no tax planning is required beyond confirming that the situation is indeed straightforward.

What happens to Centrelink treatment when you sell the home?

For Age Pension recipients, the family home is exempt from the Centrelink assets test as the principal place of residence. But the moment it is sold, that exemption ends: the sale proceeds are financial assets and count in the assets test. For a pensioner with few other assets, this change can substantially reduce or eliminate the Age Pension.

The legislation provides a buffer: sale proceeds are exempt from the assets test for 24 months (extendable to 36 months in specific circumstances) where the pensioner intends to use the proceeds to purchase a replacement principal residence (DSS Social Security Guide 4.6.3.20, https://guides.dss.gov.au/social-security-guide/4/6/3/20). The 24-month standard period was extended from the prior 12-month framework. Extensions to 36 months are available where delays are outside the pensioner's control — typical examples include construction delays, settlement disputes, or illness preventing purchase progression. The pensioner must demonstrate genuine intent to use the proceeds for a replacement principal residence; merely banking the cash without acquisition activity does not preserve the exemption. During the exemption period, the proceeds are still subject to the income test through deeming — they are treated as producing income at the deeming rate, which at current rates (1.25% on the first $64,200, 3.25% above that for singles as at March 2026) means a meaningful income test impact even while the assets test exemption is in place.

Pre-sale planning should model this transition carefully: what does the income test look like during the exemption period, how much pension is maintained, and is the 12-month window achievable given the replacement housing plan? For retirees moving between properties with a clear intended replacement, this is usually manageable. For those who have not yet identified a replacement, the 12-month clock starts running at settlement.

What is the downsizer contribution opportunity?

For eligible retirees, selling the family home creates an opportunity to contribute a substantial amount to superannuation outside the normal annual contribution caps. The downsizer contribution allows each eligible individual to contribute up to $300,000 from the sale proceeds of their main residence — giving a couple up to $600,000 combined — regardless of their Total Super Balance. An individual with a TSB above $2 million, who would otherwise be ineligible for any non-concessional contribution, can still make a downsizer contribution if all the eligibility conditions are met.

The eligibility conditions, confirmed from FirstTech's Super Contribution Checklists for 2025-26, are:

• The contributing individual must be aged 55 or over at the time the contribution is made (the age threshold was 65 before July 2022, reduced to 60 for the second half of 2022, and reduced again to 55 from 1 January 2023)
• The property must have been owned by the individual, their spouse, or a former spouse for at least 10 years prior to the sale
• The property must have been the individual's main residence at some point during their ownership
• The individual must not have previously made a downsizer contribution from a prior property sale
• The contribution must be made within 90 days of the change of ownership (typically the settlement date), though the ATO can extend this where delays arise from factors outside the contributor's control
• A "Downsizer contribution into super" form must be provided to the fund at or before the time of the contribution

Both spouses can contribute up to $300,000 each from the same property sale. The contributions do not count against the standard concessional or non-concessional contribution caps, and the contributing individual's Total Super Balance does not affect their eligibility.

What does a worked illustration look like?

Consider a couple aged 70, selling their family home of 25 years for $1.5 million. The property has been their main residence throughout, so the CGT main residence exemption applies in full — no tax. The proceeds from the sale are $1.5 million.

They purchase a $900,000 apartment as their new primary residence. After stamp duty and transaction costs of approximately $50,000 (which vary substantially by state and property value), approximately $550,000 of the proceeds remain. Both spouses are well above 55 and have held the property for more than 10 years, so both are eligible for the downsizer contribution. They each contribute $275,000 — a combined $550,000 — directly to their superannuation accounts. The contribution is within the $300,000 per-person cap and does not count against any standard cap.

The replacement apartment is their new principal residence, exempt from Centrelink's assets test. The $550,000 now in superannuation, once in pension phase, earns investment returns at zero percent tax. If the couple had instead left the $550,000 as cash in a bank account, it would be assessed as a financial asset subject to deeming — and the deemed income would run through the income test continuously. Inside pension phase super, the equivalent asset is effectively invisible to the income test (income from assets-tested account-based pensions is assessed through deeming, but at the same deeming rates; the key advantage is the 0% tax on investment earnings). The tax efficiency of the downsizer contribution, compounded over the remaining years of retirement, is a meaningful benefit.

What transaction costs should you plan for?

One of the most common surprises in retirement home sales is the total cost of the transaction. Real estate agent commissions typically run two to three percent of the sale price; on a $1.5 million sale, that is $30,000 to $45,000. Stamp duty on the replacement property varies substantially by state and property value — for a $900,000 apartment in most states, stamp duty alone can exceed $30,000. Legal and conveyancing fees, building inspections, moving costs, and any preparation needed to present the property for sale add further. Total transaction costs in the range of five to eight percent of the sale value are realistic for a substantial property, and the net proceeds available after costs can be meaningfully lower than the headline sale price might suggest.

Sources

• DSS Social Security Guide