Home Equity as Source of Income for Retirement

As you consider your retirement income needs, don’t overlook the equity in your home as a source of income. There are four options for tapping the equity in your home. The first two require a move. The other two allow you to remain in your present home.

Trade Down

Many people approaching retirement have experienced enormous appreciation in their home’s value. Selling such a home and buying a cheaper one can leave a substantial sum of money to meet current living expenses. The Taxpayer Relief Act of 1997 provides special tax treatment for gains on the sale of primary residences. Couples can exclude up to $500,000 of profit from taxation while singles can exclude up to $250,000. To qualify, you must have occupied the home at least two years during the five years prior to the sale, with some exceptions. The full exclusion is available once every two years. These new rules are especially good news for people approaching retirement who want to buy or rent a less expensive home.

Sell and Rent

The real estate market has changed to the extent that home ownership is not necessarily the best financial option. You may come out ahead by selling your home and renting either a house, apartment, or condo. This option frees all of your home equity for living expenses.

To calculate a financial analysis of owning versus renting, add up all the costs associated with home ownership. This includes the direct costs of taxes, insurance, and maintenance, plus the opportunity cost of earnings on the capital tied up in the home. Then, compare this figure to what it would cost you to rent adequate housing.

Reverse Mortgage

A reverse mortgage is a home equity loan. It can be granted only on homes that are mortgage free. Rather than making payments to the mortgage company, the mortgage company makes payments to you. As a result, you receive monthly income based on the value of your home as long as you live, or, in some cases, for a specified number of years. The money you receive is tax free since it is a loan rather than income. At the end of the term, or when you move or die, the loan must be repaid, including accumulated interest—usually by selling your home.

At this time, reverse mortgages are not available in all states. Check with your local banker, if interested.

Sale-Leaseback

Typically, in a sale-leaseback, you sell your home to someone at an agreed-upon price but continue to live in it by paying monthly rent. The new owner becomes responsible for paying taxes, insurance, and maintenance. This arrangement gives you the value of your home to use for current living expenses without requiring you to move. Sale-leasebacks can be arranged with investors, family members, community organizations, churches, and charities.