Downsizing can be tough both physically and emotionally. This can be especially true for seniors. When you realize that your home is too much for you, you must face the indelible fact that it’s time to downsize. After getting used to this idea, you must decide what you will do with your home: Will you sell it, rent it or turn it over to family members? While this can be a difficult decision, getting the right information for each option can give you more insight.
The Ins and Outs of Selling Your Current Home
Selling your current home constitutes a clean break. You can step away without the responsibility of maintaining a large home, and if your home has substantial equity, you can use it to finance your next living situation. Essentially, selling your home has the greatest potential of giving you peace of mind and allowing you to focus on the next phase of your life.
Perhaps the most difficult part of this choice is deciding which possessions you want to take with you. Chances are, you will be moving into a much smaller living space, so you may be forced to pass on precious mementos and prized possessions. On the financial end, you may face capital gains taxes and repair costs. Also, your pension, IRA or social security may be affected.
If you choose to buy a more suitable home without the profits from the sale of your current home, it is important to find out how much you can spend on the purchase. Look at your finances, including your total income, down payment funds and your monthly expenses. By creating a budget, you can safeguard yourself from buying a home outside of your means.
The Prospect of Renting
Renting out your current home gives you the benefit of retaining ownership of your property and future equity gains. If you have paid down or eliminated your current mortgage, you could earn a steady monthly income that could help you buy your new home or pay off debts. Rental tax write-offs can add even more benefit. Also, returning to your old home remains a possibility.
However, it is important to realize that renting out your home is not a clean break. With or without a renter, you are responsible for the ongoing expenses of owning a home. There are additional costs of attracting and maintaining renters, and on top of that, you would open yourself up to the risk of Fair Housing lawsuits. Depending on the state you live in, rental property may affect your eligibility for Medicaid. Equally important, managing your rental property can be aggravating and time consuming.
Keeping the Asset and Responsibility in the Family
Family members may provide a possible answer to keeping your current home and relieving yourself of the home ownership responsibilities. You may feel comfortable with allowing a relative to manage your property or live in the home. This increases the possibility of keeping your prized possessions intact and the option of revisiting your former home. You could arrange a financial agreement by which they become your rental property managers in exchange for a share of the rental income—or you could just rent the home to them.
Nevertheless, this type of family agreement comes with its own set of risks. There could be an emotional falling out between you. Typically, these family arrangements lack formal, legal agreements that have clear stipulations and boundaries. Plus, the IRS has strict rules about renting to relatives. If certain criteria are not met, you stand the risk of your home being designated “personal use” property. This means you would lose all or most rental tax write-offs.
Granted, your final decision about your current home may not be easy, and you may have second thoughts. However, weighing all the benefits and risks will be extremely helpful to a good downsizing outcome. Before you decide, give yourself time to process all the factors involved with each choice.
Blog Post courtesy of Jim Vogel, ElderAction.org