Retirement Village Units and Capital Gain

Would you sign a retirement village contract where you DO NOT receive the capital gain from the change in value of the unit from when you entered the village to when you leave the village?

There are many different types of retirement village contract provisions when it comes to capital gain, some with 100% to the resident, some shared between the operator and the resident and some with 100% going to the operator.

The table below shows 4 different variations and the differing impacts it can have on the capital base of a resident leaving a village, whether wanting to re-enter the property market or enter an aged care facility of choice. Each example starts with the same capital base of $560,000.00 and the same deferred management fee rate of 35%, the variations are whether the deferred fee is calculated on the ENTRY price or the EXIT price and what is the capital gain treatment at departure. Each contract variation produces 4 very different results that many older Australians do not envisage on entry to the village and unfortunately nor do some legal and financial advisors.



Although a Fact Sheet (it is compulsory in some states for the operator to give you a fact sheet) may say 100% of the capital gain goes to the outgoing resident, the impact of the deferred fee calculated on the sale price is such that the outgoing resident will get only that percentage left after the percentage of the deferred fee is taken.

For example :-

25% deferred fee calculated on sale price / only 75% of the capital gain $ goes to the resident.

35% deferred fee calculated on sale price / only 65% of the capital gain $ goes to the resident. (see example 3 in the table above)

Warning:- Contracts with a capital ‘gain’ provision can include a capital ‘loss’ provision.