The majority of Americans age 65 and older are homeowners and almost all of them own their homes free and clear, according to a Merrill Lynch-Age Wave survey. But in this current sellers market, does it make sense to continue to own? In other words, if you are a retiree, is there a benefit to selling your home and to rent instead?
Under current federal law, homeowners can qualify to exclude all or part of the gains received from the sale of their main residence from their income. Specifically, tax guidelines allow an excludable gain up to $250,000 per taxpayer or $500,000 on a joint return filed by a married couple. The law also permits more than one exclusion per taxpayer per lifetime.
A taxpayer can only exclude the gain from one home sale during the two-year period ending on the sale date. However, to qualify for the exclusion a taxpayer must have owned the home for at least two years and lived in the home as their main residence for at least two years. Both tests must be satisfied during the five-year period up to the date of the sale. The homeowner must report the sale of the home to the IRS even if the gain from the sale is excludable.
As a result of the exclusion, the sale of one’s home can generate a significant amount of money that can be invested and generate income. This income can then be used to help pay rent on an apartment, house or a condo. From a pure financial perspective, renting can be a more affordable option for retirees who are looking to downsize and walk away from the price tags that come with home maintenance and repair.
However, retirees often have a strong desire to age in place and own their home. But if that desire does not apply to you, renting rather than buying, regardless of housing type, allows you to invest the money from your home sale to create an additional income stream, assuming you have the discipline to use the proceeds wisely. According to Homeadvisor, in 2020, maintenance spending among homeowners who completed home maintenance projects was $3,192, a $2,087 increase from 2019.
The biggest advantage to renting a single-family home is that one can retain the greater privacy and peace and quiet that come with this type of residence compared with a multifamily property. The biggest drawbacks include social isolation and accessibility issues related to the physical disabilities that often accompany aging. Similarly, renting a condo allows one to experience its upsides without the financial obligations associated with owning one.
Renting in retirement could also be a good choice if one is moving to be near a relative who might end up moving themselves. Apartments can be the least expensive rental option of all, in part because they are often smaller than condos and houses. But one often gives up peace and quiet and privacy when renting an apartment.
As with so many things in life, there is no one size to fits all. There are many factors to consider when it comes to renting or owning. However, efforts are underway to significantly change the tax laws that may result in losing the exclusion and raising tax rates which, on a $500,000 otherwise excludable gain could result in you paying as much as $200,000 of taxes on a $500,000 sale of your home. As a result, it is always best to speak with your tax adviser prior to making any significant residential changes.
This article originally appeared as a column for the Cleveland Jewish News.