Income from Sale of Property - Payments Deferred or by Instalments

Income assessment from sale of property

The sale of a property, including the principal home, where the purchase price is paid over an agreed period, may be treated as income depending on whether or not the sale creates:

• a loan, or
• a sale agreement.    
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  Chapter 9.2 Residential Situation

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Sale of property creates a loan

If the sale creates a loan, then the loan will be assessed under the deeming provisions.    

Sale agreement

If a sale agreement provides for interest to be paid on the outstanding purchase price balance, then the interest payable is treated as ordinary income for DVA purposes.

If a sale agreement does not provide for interest to be paid on the outstanding purchase price balance, then it may be necessary to obtain an actuarial valuation of the payments due.

A pensioner may sell a property with the purchase price being paid over an agreed period. In all cases the repayment of the purchase price of the property is not income for DVA purposes.

However, the face value of amounts that are payable only at a future date must be discounted to work out their present value. If the present value of these payments is less than the current market value of the property sold, the agreement may involve deprivation of assets and a formal valuation may be required.

Formal valuation may be required

To decide whether a formal valuation is required, the present value of the total payments due under a sale agreement must be estimated. This is done by multiplying the total payments due by a discount factor. The present value of the total payments due can then be directly compared to the current market value of the property sold, to determine if a formal valuation is required.     

The discount factor will depend upon:

• the upper deeming rate at the date of the agreement,
• the term (in years) for repayment, and
• whether the purchase price is paid in regular instalments or as a single payment.

Formula used to calculate the present value

The following formula must be used to calculate the present value of the payments due under a sale agreement:

Option to purchase a property

A person may enter into an agreement to sell a property at a certain price if a particular event, such as the rezoning of land takes place. Money may be paid to this person in return for making this commitment.

Although this money may be deducted from the balance of the eventual purchase price, the sale is not certain to take place and a contract for sale of land has not been signed.

Therefore, money paid to a person in return for an option to purchase their property at a later date is money received for the person's own use and is income for the purposes of the VEA.