Should You Sell Your House, Rent It Out, or Leave It to Family?
Guest Blog Post by Jim Vogel of Elderaction.org
You’re ready to move into a downsized home for your senior years, but one looming question remains: What to do with the family home? Whether to sell a house, rent it, or keep it in a family is a decision wrought with emotional and financial conflict.
That’s because a house isn’t just the most valuable asset you own. It’s also filled with memories of married life and raising children, of Christmases, birthdays, and family reunions. That makes it hard to part with, even if you know you should.
Leaving the house to family: Can you afford it?
Keeping the house in the family is a worthy goal, but not if it leaves you in a financial bind. Seniors may need the money from a home sale for a variety of reasons:
- To purchase equity in a new home.
- To pay for assisted living or in-home care.
- To make catch-up contributions to retirement accounts.
Unless your retirement is fully funded and you’re confident you’ll have enough for expected and unexpected expenses, it may be better to sell the house and pocket the cash. If you don’t spend it all on retirement living, you’ll still have the option to leave money to children.
There are two options for seniors who are committed to keeping the house in the family but can’t afford a financial hit.
Selling a house to family
If you can’t afford to give your home to your family, sell it to them instead. There are a few strategies for selling a house to family:
- Sell outright at fair market value: This is treated like any other real estate transaction, with the upside of avoiding real estate commissions. Expect capital gains taxes if your home has appreciated more than $250,000, or $500,000 for married couples.
- Owner finance at fair market value: If you don’t need a lump sum, consider an owner-financed sale. You’ll need to charge a reasonable interest rate to avoid gift taxes and claim interest payments as income. However, you can gift up to $15,000 annually against the loan balance without penalty.
- Sell below fair market value: It’s possible to sell below market value (the average sale price for a home in Olathe is around $285,000), but the difference is considered a gift by the IRS and is subject to gift taxes.
Renting a house for retirement income
As you can see, selling a house to relatives can get complicated. However, there may be a better way to tap into your biggest asset and keep it in the family.
Renting out the family home avoids the complications of gifting or selling a home while living. Instead of worrying about seller financing and tax payments, you can bequeath the home in a will or trust or sell it later if the need arises. The biggest perk or renting is that you can enjoy a steady cash flow to help cover your expenses, all without losing your investment.
Renting out a property does require more work, however. Even if the property is advertised as furnished, seniors need to declutter and depersonalize their homes to appeal to renters and protect their own privacy. This is challenging if you own heirlooms or furniture you intend to leave to family, but a storage unit can keep personal items safe without cluttering up the home. Assess what’s headed for storage so you only buy as much space as you need. A typical 10’x10’ unit in Olathe costs around $73, but you can find same-sized storage units in the area for $61.
Unless you have prior experience as a landlord, it’s best to avoid self-managing the rental property. Budget enough money for cleaning, maintenance, and repairs, but hand off the actual work to a property management agency. While it may shrink your profit margin, the cost of professional property management is well worth the hassle it saves.
There’s one more question to consider as you decide what to do with the family home: Do your kids want the house? If the house is likely to be sold as soon as it’s inherited, selling now is more practical (and far less stressful) than hanging onto it. Whatever you decide, make sure you’re considering all the factors when planning your estate.
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