The Financial Considerations of Keeping or Selling Your Home in Retirement

As our clients move further into retirement, we often see a consistent theme: “I have a large home with fewer people living in it.” This usually sparks conversations around wanting to be closer to family and grandkids or downsizing to reduce their house maintenance responsibilities. In many cases, our clients’ adult children have moved away for work or marriage, or a surviving spouse or divorced client is overwhelmed by maintaining their home on their own. Naturally, in each of these scenarios, many retirees consider relocating. 

There are various financial considerations and emotional implications to evaluate before moving, selling your home, or buying a second house. Let’s review the key factors we often discuss with clients in this situation to help you make a more informed decision.

Should You Sell or Keep Your Current House?

What should you do with your original house if you decide to relocate? Deciding to sell often comes with emotional considerations that may influence your choice, such as:

• Social Connection: Older clients typically have smaller social circles and crave more connection and stimulation later in life. In these cases, it may be the perfect time to move closer to your family for support and quality time with loved ones.
• Sentimental Value: Still, selling your current home may generate various emotions because of its sentimental value — if you built your dream home, raised your children there, or cultivated a community. How much it means to you may outweigh the financial implications of selling it.

How Long Have You Lived in Your Home? 

If you’ve lived in your home for 10, 20, or 30 years, you’re likely benefiting from a low-cost basis, mortgage rate, and property taxes, which could also impact your decision to keep it. 

• Step-Up in Basis for Heirs: If you decide to hold the home as a second home or rental property until you pass, your heirs will benefit from a step-up cost basis, which adjusts the home to the fair market value on the date of your death. This is essential to determining how much capital gains your heirs will pay. For example, let’s say you purchased your home decades ago with an adjusted cost basis of $100,000, and its value has appreciated to $700,000 today. 
  • Without a step-up in cost basis, you may be responsible for capital gains taxes on the $600,000 appreciation ($700,000 − $100,000). 
  • With the step-up in cost basis, if your heirs sell the home close to the fair market value shortly after inheriting it, they may pay significantly lower or no capital gains taxes on the sale.
• Mortgage Rate: Securing a favorable mortgage rate is a top priority when considering buying a new home. If your original home’s rate is lower than the current rates and you can afford it, you may consider keeping it.
• Property Taxes: Low property taxes may be less of an issue if you’re moving to a state with no property taxes. Still, it may be worth preserving those rates by converting your home to a rental property or keeping the house if you can afford it.

Can You Afford to Keep It?

Everyone’s financial situation is different, so working through the numbers is essential to determine if you can, should, or want to keep your original home. 

• Overall Costs: When considering the costs of moving, insurance, taxes, and potentially two mortgages, holding multiple properties can be expensive. However, working with a professional can provide more clarity about your total financial picture, which can help you determine if it’s still a good investment as a second home or if its sale proceeds could contribute to a new home.
• House Maintenance: Maintaining two properties can often feel overwhelming, especially if you’re living alone. Consider how involved you want to be in house upkeep to determine if it’s worth keeping or if downsizing to a home with fewer responsibilities makes more sense.

Should You Rent Out Your House?

There are further considerations if you convert your original home to a rental property.

• Income Stream: A rental property is an opportunity for an additional income stream, providing excess cash to offset the cost of a second home or supplement your retirement income.
• Rental Property Management: Another factor to consider is whether you or a property manager will maintain the house. This will again depend on your physical and financial ability and preferences later in your retirement.

Planning to Relocate in Retirement? Monarch Can Help

We often observe the progression of retirees relocating for various reasons later in life. While there are many emotional and financial implications, you can make the best decision for you and your family with trusted guidance and a clear roadmap. Here are a few of the ways we can help:

• Forecasting and Analysis: Through comprehensive planning, you can better understand your full financial landscape to make decisions tailored to you. We can run calculations based on various scenarios so you can get an idea of your total short- and long-term costs and benefits.
• Updating Your Wealth Management Plan: We’ll help ensure your wealth management strategy and estate plan reflect any new goals or changes you make to your property, location, or assets.
• Professional Collaboration: We’ll work with your extended professionals, such as CPAs, lenders, insurance agents, and accountants, to provide financial clarity from every angle. We can review items like loan terms and insurance coverage to help ensure solutions meet your needs and are in your best interest.

If a move has been on your mind, please contact our team so we can address your questions and help you prepare financially.