Should You Keep Your Family Home When Downsizing?
Whether you’re moving to an assisted living facility or just moving across town, you have a big decision to make regarding your home. Will you sell it, keep it in the family, or hold onto it as an investment? Before you decide, ask yourself these three questions.
1. Can I afford to move?
If you’re moving due to medical necessity, finances aren’t your primary concern. However, seniors who plan to sell their house and buy new should be prepared for the real estate market. Homes in Decatur have been selling for $225,000 on average over the last month.
2. Is my house ready for another owner?
Whether you’re selling or renting your home, it needs to be in good condition to attract a market rate price. In addition to cleaning and staging, repair anything detracting from your home’s value and update appliances, wall colors, and fixtures to modern tastes. You can skip this step if you plan to leave the house to family, but keep in mind your relatives may not want a project house.
3. Is my retirement fully funded?
Even if you can pull off buying a new house without selling, it may not be the right choice for your financial security. Unless you’ve saved enough to weather any financial disaster, including extended long-term care, you should sell your home and use the proceeds to pad your nest egg. If you end up with more than you need, you can still leave it to your children.
How to Leave a House to Family
There are three ways you can leave your home to your children:
- Gift the property outright. Deeding the home over is the simplest option, but it also comes with the greatest tax repercussions. Gifts in excess of the $15,000 annual gift tax exclusion are counted against your $11.4 million lifetime estate and gift tax exemption. What’s more, your children will also owe capital gains on appreciation since the property was originally purchased if they sell.
- Leave it in a trust. Two types of trusts are used to leave real estate to family. The first, a Qualified Personal Residence Trust, allows seniors to continue living in their homes. However, the irrevocable nature of this trust makes it risky. A better choice is a revocable living trust, which can be changed at any time while you’re alive.
- Sell it. Selling a property to family at market rate is treated like any other sale. Selling has the benefit of stepping up the tax basis so your loved ones owe a lower capital gains tax upon selling. Homeowners can even finance the property and gift money to help their loved ones to repay the loan, but they must charge interest. When selling below market value, the difference between the sale price and the appraised value is considered a gift and taxed as such by the IRS.
Some states also allow homeowners to transfer the deed upon death. Similar to a payable-on-death bank account, this type of property transfer allows families to avoid probate. However, transfer-on-death deeds aren’t permitted in New York state.
How to Convert Your Home to a Rental Property
Renting your property is a great way to boost your retirement income, and you can still decide to sell later if the property value increases. Or, if you prefer, you can hold onto your investment and leave it to your family when you pass. Despite the benefits, becoming a landlord isn’t for the faint of heart. These are the steps you’ll need to convert to a rental property:
- Check if your mortgage’s occupancy clause and refinance if needed.
- Familiarize yourself with landlord-tenant laws.
- Buy insurance.
- Clean the property and remove furnishings.
- Determine rental policies including rates, occupancy limits, and pet policies.
- Hire a property management agency.
If neither of these options is right for you, simplify your life by selling. You’ll still have the option to leave money to your children, without the hassle of managing a rental property or navigating complicated tax law. That’s not to say selling your house is a walk in the park! However, with the right real estate agent, you can get your old house off your hands and move on with life.