Important: Before you take any action, always discuss your situation with your own professionals, such as your accountant, investment advisor, attorney, trustees, and any other advisors you work with. This post is general information only and is not advice for your situation.
The situation
For many homeowners, their home is the largest single asset they own. As they look forward to retirement, it raises a practical question:
How do you turn some of that equity into income or flexibility without giving up more than you intend?
There are several routes to consider and you should consider all of them carefully before moving forward. To see how much of your overall wealth is tied up in your home, read How Much of Your Wealth Is in Your Home?
Option 1: Sell and move to a smaller or less expensive home
Selling frees the most equity. You can buy a smaller home, buy in an area that is “further out” and lower cost, or rent.
For many this is doable because they no longer need to commute to an office and the time that that takes out of their day.
On the down-side, costs include selling and moving expenses and, depending on your situation, taxes on the gain from the sale. Generally, up to $250,000 of profit ($500,000 for married couples filing jointly) can be excluded if you meet the ownership and use rules. Check with a CPA.
How the home sale exclusion works (example for illustration only, not tax advice). Taxable gain is generally the sale price, less selling costs, less what you paid for the home and spent on capital improvements, less the exclusion. The exclusion generally requires that you owned the home and lived in it as your main home for at least 2 of the last 5 years. Check IRS Publication 523 and talk with a CPA. If you are timing a sale around your plans, see When Should I Sell My Home? If you want to buy your next home before this one sells, see I Found a Home I Love for Retirement, but I Don't Know if Mine Will Sell.
| Sale price | Selling costs | Purchase price and capital improvements | Exclusion | Potential taxable gain |
|---|---|---|---|---|
| $1,500,000 | − $90,000 | − $700,000 | − $500,000 (married, filing jointly) | = $210,000 |
Option 2: Sell and rent
The up side:
- Renting avoids maintenance and ownership costs and keeps proceeds invested or available.
- If you are still working you can rent near your place of employment in the interim before you’re ready to buy.
The down side
- Rents can rise and you’ll need to accommodate this in your planning.
- You remove the opportunity for equity growth if the market goes up.
Our caution
We’ve heard from many potential sellers who are trying to “time the market.” While this does work out from time to time, it is not something we recommend unless you have very specific needs.
If you are considering this we highly recommend that you reach out to us and we can help you through your decision, identifying the pros and cons so you can make an informed decision.
Option 3: Stay and borrow against the home
For those that don’t want to leave where they live now, there are options. These generally allow you to be able to participate in any equity appreciation.
| Option | How it works | Pros | Cons |
|---|---|---|---|
| Cash-out refinance | Replaces your current mortgage with a larger one, and you take the difference in cash. | One monthly payment. Can be a fixed rate. Large lump sum. | Gives up your current rate, which is a real cost if it is low. Closing costs. Larger balance. You must qualify on income and credit. |
| Home equity line of credit (HELOC) | A revolving line with a variable rate. You draw what you need. | Borrow only what you need. Interest on what you draw. Keeps your existing mortgage. | Variable rate. The lender can reduce or freeze the line. Qualifying can be harder in retirement. Your home is collateral. |
| Home equity loan | A lump sum with a fixed payment, on top of your existing mortgage. | Fixed rate and payment. Keeps your existing mortgage. | A second monthly payment. Closing costs. Qualifying can be harder in retirement. Your home is collateral. |
| Reverse mortgage | Generally for homeowners 62 and older. You receive funds without monthly mortgage payments, and the loan is repaid when you move out or pass away. | No monthly mortgage payment. You stay in the home. | Costs and fees. The balance grows over time. You still pay taxes, insurance and upkeep. Less equity left for heirs. Federally insured versions require counseling with an approved counselor. Rules and limits change; see the HUD and CFPB links in this post. |
As always, we are available to help you through this thought process to find the right strategy and balance for you.
Option 4: Stay but earn from the home to offset costs
Renting a room or an accessory unit can add income, subject to local rules, zoning, permits and your insurance.
It is not unusual for people to utilize the extra space that empty nesters have to help offset other expenses. Consider family (children, parents, relatives), family friends, etc. This is especially beneficial if you are planning to purchase a home elsewhere but want to keep a “landing pad” in your current neighborhood until you’re ready to sell.
Questions to ask before you choose
- How long do I want to stay in this home, and what does aging in place require?
- How much income do I need, and for how long?
- What happens to the loan or the sale proceeds if my health or plans change?
- What are the tax effects, and how does this affect any benefits I receive?
- What do I want to leave to my family?
What not to do
- Do not borrow against the home to cover ongoing spending without a plan for repayment.
- Do not sign anything you do not understand, and be cautious with unsolicited offers.
- Do not decide in a rush. Get a net sheet and talk with a financial advisor and CPA first.
Want to investigate on your own? These are good places to start:
What others in our area are doing
In our experience, we have seen variations on all of these potential solutions. Each one has positives and negatives. We’ve seen and talked with clients who didn’t understand some of these, and eventually decided to move forward with ones they dismissed previously. Please consider each of them carefully; even if you think they are not the right ones they might actually be.
From Our Own Experience
A long time family friend is currently planning to move to a warmer climate for retirement. Their home holds a lot of equity, and they're looking to get a certain amount of that at the sale. Through great planning they were able to afford to purchase their second home, plus their primary home is already paid off, giving them options since they are in a good position to keep their primary home with an adult child living there until the home sells.
Whether or not the home sells at their target price, they have a great plan in place until it does:
- The rent the child pays helps offset utilities and taxes
- Someone is living within the home, which reduces the possibility of catastrophic issues going unnoticed (e.g., water leaks, frozen pipes, etc.)
- They can come back and visit (there are grandchildren in the area) in a comfortable, known location
While the future is unknown for all of us, these clients are set up for whichever way things go.
Every situation is different and we’re here to help walk you through the options.
Thinking about selling in the Seattle Area?
Kelly Azzarello Real Estate | Compass
Email: kelly@kellyazzarello.com
Phone: (425) 830-6457
Web: www.kellyazzarello.com
Instagram: instagram.com/kellyazzarello
YouTube: youtube.com/kellyazzarellorealestate
This post is general information about real estate topics. It is not legal, tax or financial advice, and it does not replace a professional inspection. Rules and practices differ by situation and change over time. Check current requirements and talk with a licensed professional, such as an inspector, contractor, attorney or CPA, about your own property.
Financial: Financing terms, rates and eligibility vary by lender and borrower. Talk with a lender or financial advisor before making decisions.
Tax: Tax treatment depends on your individual circumstances and changes over time. Consult a CPA or tax professional about your situation.
