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  • Nancy Webb

Should you Rent or Own Your Home in Retirement? The Devil is in the Details.

I have always assumed that owning my own home is part of the American Dream. That it represents a measure of success or the milestone of “I have arrived” in our society. On the other side of this argument is the stigma associated with renting.

As I get closer to Retirement – I have an Angel (or is it the Devil) on one shoulder softly whispering “You are throwing your money away when you rent – when you buy, you build up equity, something to leave to the kids.”

Then on the other shoulder, a Devil (or an Angel in disguise?) gruffly states, “Renting is the way to go – it can cost a lot less money and you have fewer hassles. Owning is for losers. Think of what you can do with the extra money. Anyone for slots in Las Vegas?”

Then the rational portion (Prefrontal Cortex) of my brain kicks in responding to the Angel and the Devil - “There are good points for both of your arguments – but does it matter?” As both options have major financial implications, let’s look at which factors to consider for your particular situation. Some of these are within your control, while others are out of your hands.

Gathering Intel

How much is your home worth? If your home isn’t valued at what you would expect or if it has substantially increased in value – you may be more or less financially motivated to sell.

What is your remaining mortgage balance? When you sell, you will be forced to pay off the remaining mortgage with the proceeds. If you are mortgage free – then you will have more money.

How is the real estate market performing? Long-term as well as shorter-term market conditions should be considered. The Federal Reserve controls interest rates and this affects what mortgage rate buyers will obtain, and subsequently their monthly payment.

What is the condition of your home? In hot market conditions, buyers will buy anything. In a slower market, a home that is move-in ready will be more attractive. Be sure to consider what amount of work you would have to put into the house to sell.

What is the timeline for selling? Create a timeline to consider both the emotional and financing aspects of when you are ready to leave. Do you want to move the moment you retire or a bit later to adjust to your new lifestyle?

Reasons to Sell

You will get money: If your home has gained equity – selling will contribute to your retirement accounts. Be sure to consider a possible tax liability. Recent changes to capital gains tax legislation allow single taxpayers to exclude $250,000 of capital gains from their return while married couples can exclude up to $500,000 of the gains.

You will no longer have a Mortgage: This can be a godsend, as income is usually less in retirement. Of course, when you sell, you are required to pay off the associated debt. This will come out of the net proceeds, but you will no longer have the long-term liability and associated monthly debt.

Maintenance, Home Insurance, and Property Tax Costs go Poof: These costs will magically disappear the instant you no longer own the home. As the value of your home increased during ownership – the property taxes, as well as insurance, increased. Same for maintenance, the older the home – usually the more maintenance is needed. You no longer have to worry that you don’t have funds on hand to cover these expenses if you rent.

Then there is Downsizing: Chances are that living in the family home is no longer in sync with your empty nester retirement lifestyle or your financial situation. Larger homes have higher energy costs, larger yards higher landscaping costs, and higher maintenance costs. When downsizing, mobility issues should also be considered. Are there stairs? Public Transportation and Walkability of the neighborhood should be factored into your new home (whether you own or rent.)

You get to move: Yes, some people can’t stand the thought of moving, while others embrace the change and excitement of a new location. Being in the best school district or near your workplace is not that important anymore. Where you move can be focused on different criteria, such as a lower cost of living, being immersed in nature or city life, closer to family, and of course greater financial freedom.

Reasons to Keep your Home in Retirement

Emotional: The stress of selling your home and determining where your new home will be may not be your ideal way to live the more relaxed, carefree lifestyle you imagined for your retirement. So, it may make more sense to stay where you are.

You Might Actually Save Money: You may already own your home outright. If you have had your mortgage for a while – the chances are that the majority of that payment is going towards an asset you own as opposed to an unrecoverable interest expense. As mentioned earlier, there are costs associated with selling a home that should be factored into the decision to sell. Then, there is the actual possibility that your mortgage payment (including insurance and property tax) is less than the current rental rates in your market.

You Want to Leave Something to the Kids: You may be planning to leave the family home to your spouse, children, or other heirs which may also come with some inheritance tax benefits. You will also avoid potential capital gains tax that you will incur if do sell.

What about the debated Reverse Mortgage: This type of mortgage allows you to withdraw equity from your home. Instead of paying a monthly payment – it is a withdrawal of your accrued equity. These funds usually come in the form of a monthly payment and can be used to pay for the expenses of your choice. Please note that as a homeowner you will remain responsible for taxes, insurance, and neighborhood association or condo monthly fees.

Tax Benefits of Owning your Home: No, you don’t quit paying Federal Income Taxes when you retire. Yet, homeownership comes with tax perks, such as the ability to deduct the interest you pay on your mortgage (limited to mortgages of $750,000 or less or $375,000 for single filers) as well as up to $10,000 of property taxes. You also do not pay taxes on the income you receive from a reverse mortgage, as the IRS considers this income as loan proceeds. Your rent expense is not deductible. On the other hand, if you sell your home and invest the proceeds – you may have to pay taxes on your returns.

Owning or Renting?

Remember that there is more to life than money. Even if the calculator says that renting is more practical, that doesn’t mean you should drop everything and sell your home. For some, the financial implications take the decision out of our hands, and it is just too expensive to live in the home on their retirement income. If the upkeep of the home is an unwanted obligation, then don’t live in misery. Similarly, don’t deprive yourself of your homeownership dream if you can afford it, and if owning isn’t that much more expensive than renting.

Knowing if it is better to rent or buy is clearly a very personal decision. Don’t leave this choice to the Devil on your shoulder. If you take all the factors into account, have the confidence that you can make the best choice for your situation.

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