Downsizing can be a smart decision for seniors. However, it can also cause stress and confusion. Choosing what to do with your home when you decide to downsize can be complicated. Essentially, it comes down to one of three choices: selling your home, renting it, or passing it on to family.
Selling Your Home
Selling your current property can net you a profit you can put toward a new home, medical expenses, or even a big trip. The beauty of downsizing often means less stuff and more money, especially if you decide to sell in a good market.
Before listing your home, check out comparables in your neighborhood. Comparable homes are those that have recently sold and have similar features to your home. Factors like square footage, number of rooms, age and condition, amenities, and lot size can all affect pricing trends.
Forbes’ expert also recommends looking at comparable listings no more than three months old. The real estate market changes quickly. Using outdated information to make a pricing decision can negatively impact your bottom line.
Renting Out Your Property
If you decide not to sell your property, renting can be a viable option. Plus, rental income can count toward your bottom line each month, bolstering your savings or paying down debt. Per SmartAsset, pricing a rental at between .8 and 1.1 percent of the home’s value is a reasonable figure. Therefore, a home that’s worth $2.5 million may rent between $20,000 and $27,500 per month.
Keeping Your House in the Family
You can choose to keep your house in the family either by renting to loved ones or passing the home to them through a legal transaction. However, renting to relatives can have many pitfalls—including the inability to claim certain deductions if you rent to them below market value.If you choose to transfer ownership of a house for a figure other than market value, that can cause tax problems. If you give away more than $14,000 per year, the IRS requires you to pay gift tax, Block Advisors notes. You may be doing your family a favor, but you’ll have to pay more in taxes to cover your generosity.
Of course, the alternative is leaving your home to a family member in your will. But that means they must wait to inherit your property until you pass away. Plus, even adding a joint owner to your house’s deed can involve complications if the home is sold. In such a scenario, there are few tax consequences—until you pass away and your family members must deal with taxes and inheritance.
Especially if you’re not selling your old home to buy a new one, you should consider how much house you can afford on your current income. Of course, rental income from your existing home does not affect your Social Security disability benefit potential, Disability Benefits Help notes. Because they’re considered unearned income, rental streams can be a helpful bolster for your finances.
Still, you should reference your monthly income when determining how much house you can afford—including how much of a down payment you can put together. According to The Balance, most mortgage lenders typically require that your recurring debt equals 43 percent or less of your monthly income. Budgeting can help you plan and see how much you spend now—setting a budget and sticking to it can help you find balance.
The decision to downsize involves many crucial decisions, including what to do with your home. Fortunately, downsizing can lead to a more enjoyable and stress-free life.
