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Should you stay in your home as you age?

Deciding whether to stay in your home or downsize in retirement can be a challenging decision. It’s not just a financial question, but an emotional one, too. You built a life in your home, and you’d like to be able to stay there as you age. However, there are financial and tax considerations around how staying put may impact your children and beneficiaries. Let’s walk through the primary questions you should be asking yourself.

1.  What kind of asset is your home?

First, consider whether your home will be your primary residence in retirement. If not, there may be different tax and financial planning considerations.

Next, consider the monthly expenses tied to your home. If your mortgage is manageable (or your home is paid off), staying put can help you avoid costly interest payments that might come with purchasing a new property. (Mortgage rates for a 30-year fixed-rate loan topped 7% in early 2024.)

Finally, think about how much equity you have in your home. Home equity can be a useful tool that you may be able to tap into, if needed, as you age. Just remember, home equity can be an illiquid asset; accessing in retirement may require careful planning.

2. What do you want to do with the property after you’re gone?

If you plan to pass your home to your children or heirs, consider how gifting the asset can impact your tax strategy, as well as theirs. However, the gift and estate tax are frequently misunderstood. Here’s how they work. 

The IRS charges a gift tax when you give assets to someone without receiving anything in return. You must log any gift above a certain amount ($18,000 in 2024) with the IRS. These gifts count against a lifetime estate tax exemption. So long as your gifts fall below the estate tax threshold ($13.61 million for a single individual in 2024), your estate will not be subject to federal tax when passed to your heirs.

3. Property taxes: How much is your home worth?

In addition to any outstanding mortgage payments, property taxes may be the biggest consideration for most homeowners thinking about downsizing. Property taxes can be a significant expense for retirees living on a fixed income.

In many states, property taxes are based on the assessed value of the home. Since property values tend to appreciate over time, historically, homeowners may face steadily increasing tax bills, which can impact your lifestyle in retirement.

California takes a slightly different approach to property tax—your tax rate is based on the home’s purchase price; the rate increases each year based on inflation (versus market appreciation). Prior to 2020, the initial assessed value, which tends to be far below current home prices, passed on to heirs. In 2020, however, California passed Proposition 19 to complicating that practice.

That means, if you plan to keep your home and pass it to your children, they may end up paying significantly higher property taxes than you do currently. Ask yourself: Will my child be able to afford those higher property taxes? If not, you may have less incentive to keep your home in order to pass it on to the next generation.

Keep in mind: Many states follow this same step-up basis for assessing property value. While it can be a negative in terms of property tax, the step up may help your child down the road, as they may pay less in capital gains tax if they end up selling the house for a profit.

Choosing to stay in your house as you age tends to be a decision rooted in your plan for retirement and your plan for passing your assets on to the next generation. Be sure to consider the financial impact to you, as well as your heirs, alongside the emotional factors that may motivate you to stay in your home as you age.

Remember: No decision is permanent. A financial advisor can help you align your financial and tax plan to your goals, now and in the future. If your (or your children’s) financial circumstances change, you can always pivot and decide to downsize.

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