Should I Sell My Home at Retirement?

Anbarasan Appavu
Regardless of your retirement goals, you must consider whether you will remain in your current residence. Some retirees downsize from homes once occupied by children. Others may wish to remain in their current residence. Both options have significant financial ramifications, so let's examine which option may be more advantageous for you.
Should I Sell My Home at Retirement?

• Before deciding whether to sell your home, you should consider its value, the performance of the housing market, and the readiness of your home for sale.

• Retirees contemplating the sale of their home will receive a substantial sum of money and no longer be required to pay property taxes, homeowners insurance, as well as repairs and maintenance expenses.

• There are also capital gains tax breaks for eligible taxpayers to exclude a portion of their capital gains from tax liability.

• Other retirees who have paid off their mortgage, have all of their accessibility needs met, and are planning to leave their home in their will may be better off keeping their home.

• By maintaining their residence, retirees can obtain a reverse mortgage to cover their monthly expenses and unforeseen costs.

Evaluating the Current Housing Situation (Valuation)

Before examining the reasons to sell or remain in your home, it is a good idea to consider all of the factors influencing your choice. Some of these are under your control, while others are beyond your influence. Prepare to answer the following questions prior to making your decision to sell or remain.

What does your home worth?

If your home is significantly undervalued or significantly overvalued, you may be motivated to sell for financial reasons.

What is the remaining balance amount on your mortgage?

If you sell your home, you will be required to pay off the remaining balance on your mortgage with the proceeds. If you have already paid off your mortgage, your after-tax funds will be greater.

How the real estate market currently performing? 

This is relevant not only in the long term (i.e. years), but also in the shorter term (months). Consider the impact of monetary policy and the Federal Reserve's control of interest rates on the housing market as a whole. It may be in your best interest to hold on to your home for some time before selling it in the future. Occasionally, real estate markets are so competitive that people will purchase anything.

What is the current condition of your home? 

However, your home will garner more interest and offers if it is in move-in condition. Consider the amount of work (if any) you would perform on your home prior to selling it as you decide whether or not to do so.

What is your timeline to sell your home? 

 You may be ready to leave your home the day you retire, or you may find it difficult to let go of the memories that the roof and walls helped to create. Your timeline should reflect both the emotional and financial aspects of your anticipated departure date.

It is more likely that profits will be maximized if a home sale is delayed until July, whereas March is the best month for closing.

What are the Reasons to Sell Your Home during Retirement?

There are many compelling reasons to sell your home upon retirement. Typically, this strategy begins with the sale of your residence. Then, you have several options, including moving in with family, purchasing a smaller home, relocating to an area with a lower cost of living, or becoming a renter. Here are a few of the potential advantages of selling your house:

You will Receive an Influx of Funds

Many individuals today enter retirement without sufficient savings. If you own your home outright or have substantial equity in it, selling it could generate the additional funds you need for your retirement accounts.

The amount of money you will ultimately have depends on a variety of factors. Initially, the housing market and local competition will determine your home's value and buyer interest. After the sale, you will likely be responsible for at least a portion of real estate commissions and must pay off your remaining mortgage balance. You may also be required to pay taxes on a portion of the profit.

You Will Lose Your Mortgage

A mortgage is the largest financial obligation for many individuals. Even if you've made significant progress in reducing your debt, you may still be obligated to make a high monthly payment, especially when you consider that your income in retirement is likely to be lower. Especially if your mortgage has a variable interest rate and current interest rates are unfavorable.

When you sell your home, you will be required to pay off the remaining balance of your bank obligation. Although this will reduce your net cash proceeds, you will be released from a long-term obligation and no longer be required to make the high monthly payment.

You may Receive a Tax Deduction

Many retirees are reluctant to sell their homes because they are unaware of the tax implications. Thankfully, there are favorable tax laws that safeguard taxpayers and frequently reduce the tax burden. Recent modifications to the capital gains tax law permit single taxpayers to exclude $250,000 in capital gains from their tax returns. Couples who file a joint tax return can exclude up to $500,000 in profits.

There are restrictions on who can and cannot utilize this tax exemption. Generally, you must have lived in your home for two of the past five years prior to the date you plan to sell it. This exemption may only be claimed once every two years. There are also circumstances in which the exclusion is inapplicable, such as when the property is not your primary residence or was acquired through a 1031 exchange.

You Can Eliminate Maintenance Costs

Some retirees are concerned that they may not have sufficient emergency funds. This may involve repairing a roof, replacing a broken hot water heater, or managing a mold infestation at your residence. There is no way to plan for these costs, and for some, it is difficult to imagine being able to pay for them in retirement with limited or no income.

You Can Avoid High Property Taxes

Similar to maintenance expenses, property taxes are frequently costly outlays of cash. However, property taxes are assessed annually, and even though the amount is known, failure to pay may result in a lien being placed on your home. If you've lived in your home for a sufficient amount of time, you've likely witnessed how increased home values have resulted in significantly higher assessments. For some, they will simply lack the cash flow to pay the ongoing government fees.

You Should Downsize

This is a philosophical topic for some. Others view it as a financial issue. Typically, living in a larger home will result in higher utility costs. Large yards may necessitate an increase in annual landscaping expenses. Larger homes with higher assessed values will incur higher property taxes and insurance rates. Some of these expenses may no longer be compatible with your retirement lifestyle.

You'll Get to Move on to Your Dream Home

The ideal residence probably has a different meaning to a retiree than it did when they were younger. You may have previously sought a residence in the best school district or close to a workplace, but as a retiree, you likely have different priorities. Moving even a short distance can result in a change of scenery, proximity to family, improved amenities, and increased financial independence.

Consider the financial consequences of moving in with family. Although you may not be charged rent, you may still be responsible for additional expenses such as food, utilities, and furnishings.

Reasons to Retain Your Home in Retirement

Retirement is a symbol of hard work; after a long career, it is time to leave the workforce and begin living a more carefree, relaxed lifestyle that you've earned. While this supports the notion of not beginning retirement with a stressful, costly home sale, it may be more financially prudent to remain in your current home and not sell it in retirement. Here are several reasons:

You Might Save Money

Many recognize the financial advantages of remaining in a home that they already own or have substantially paid down. If your mortgage has already been paid off, you may not have a monthly payment. If you still have a mortgage, there is a good chance that the majority of your payment is applied to an asset you own, as opposed to an irrecoverable interest expense.

There are many expenses associated with selling a home, including repairs, maintenance, staging, photography, the real estate agent's commission, moving trucks, and storage. Depending on the length of time you've owned your home, your mortgage payment may have been less than the market-standard rent.

You Have Long-Term Plans for an Inheritance

Many retirees consider succession planning, which may begin with their residence. You may wish to leave your property to your heirs so that they can benefit from a favorable tax basis. There are financial advantages to avoiding potential capital gains on the sale of your home and inheritance taxes on the receipt of specific assets by your estate, regardless of sentimentality.

You are Interested in a Reverse Mortgage

A reverse mortgage is the process of withdrawing home equity. This equity is converted into cash flow (similar to income), which can be used to pay monthly bills or unexpected medical expenses. A reverse mortgage enables you to retain ownership of your home while still providing emergency funds.

You can only obtain a reverse mortgage if you have equity in your home. For taxpayers who have recently obtained a mortgage, they may not qualify or be permitted to withdraw a lesser amount.

Your Home May Needs Little Upgrades

The transition into retirement is a welcome change of pace for many. You will always require more accessibility and accommodations to ensure your safety and mobility within your home as you age. There may already be some of these items in your home. If not, at least you can begin to prepare. By returning to renting, you will have less control over the property and less ability to install, construct, or customize your living space to meet your needs.

Your Mortgage Payment May be Constant

You cannot predict your emergency expenses or when they will occur. Other than this, more of your expenses are predictable when you own versus when you rent. Your mortgage payment is fixed, whereas renters may be subject to significant annual increases. In addition, although other expenses, such as property taxes, may increase slightly each year, you know exactly when they will be billed so you can budget accordingly.

Different Tax Benefits Result from Ownership

Additionally, owning a home during retirement provides tax advantages. Married couples filing joint returns will be able to deduct up to $10,000 in property taxes from their federal income tax returns. In addition, reverse mortgage income is not taxable. In the meantime, rent payments are not tax deductible, and investments in non-tax-sheltered accounts may be subject to the highest ordinary tax rate.

The Psychology Behind Selling Your Home

There are undeniable psychological aspects of selling your home in retirement that must be taken into account in great detail. For some, financial considerations may be decisive. It may be too expensive for them to continue living in their current home during retirement, or the unpredictability of emergency fund savings may be too risky for the amount they have saved.

The objective should be to make a decision based on both emotional and monetary considerations. Occasionally, one can outweigh the other. However, both must be aligned over the long term to guarantee a secure and joyful retirement.

When I retire, what are the benefits of selling my home?

When you retire and sell your home, you will no longer be responsible for mortgage payments. You will not be responsible for paying property taxes, homeowner's insurance, repairs, or maintenance. You will incur new types of expenses, such as rent, renter's insurance, and pet deposits/rent, but the sale of your home will provide a substantial influx of cash to help cover these costs.

What Taxes Need to Pay When I Sell My Home?

You may be eligible to defer a portion of the capital gains you realize from the sale of your home. If you are single, you may be eligible to exclude up to $250,000 of profit, while couples may be able to exclude up to $500,000 of profit. These exclusions are contingent on qualification.

Is Owning More Expensive Than Renting?

For the majority, ownership is more expensive. A mortgage is accompanied by monthly interest payments, property taxes, and pricier insurance premiums. Homeowners are responsible for repairs and maintenance, whereas renters frequently pass these costs on to the landlord.

How Can I Determine If I Can Retire?

When determining if you can afford retirement, you must compare two factors: your income/savings and your expenses. Determine how much money you have saved and what your retirement income (such as Social Security) will be. Afterwards, estimate your monthly expenses.

If your income is insufficient to cover your expenses, repeat the calculation above, taking into account whether or not you sell your home. In either case, your expenses will fluctuate.

The Bottom Line

When it comes to retirement planning, your home is one of the most important assets to consider. For some, it makes valuable reasons to sell. For others, it is best to remain in place. Evaluate your own financial situation to evaluate which option is best for you, and seek the advice of a financial advisor if you're uncertain.

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