It is estimated that, by 2024, one in four people in the United States will be 60 or older. People are living longer. At some point, many seniors will sell their homes, whether it be a choice to downsize or because circumstances force them to make a move.
By the age of 55 or 60, most people have purchased or sold a home and just about everyone has been through a move. But, after 55, real estate transactions and even moving, are more complicated. If children were raised in the home, the thought of leaving the place where some of the dearest memories were made can be painful. Also, the logistics of preparing a family home for a sale and downsizing a lifetime's worth of possessions can be daunting. Moreover, the financial and tax implications of selling a home can affect that long-awaited (and much deserved) retirement or change estate planning.
In their 70s, Sheryl and Craig Wendland are hesitant to sell the Pleasanton home they have lived in for years because of the emotional and financial aspects. "We thought when we retired we'd move to a smaller home or a cheaper area," Sheryl said. "But, no, we love our home, love our neighborhood and love our community." And the financial impacts are "really scary," Sheryl said. "But if one of us gets ill, or we both become ill or one of us dies, we'll do what we have to do."
A recent study reported that the top three reasons seniors give for making a move are changes in health, freedom from home maintenance responsibilities, and a desire for peace of mind.
Some things to keep in mind when considering a later-in-life home sale include the following:
It's a family affair
Although most seniors make the decision to move, their adult children or other family members sometimes help them decide whether moving is the best alternative. To prevent misunderstandings, it's a good idea to gather the family members who are affected and discuss the decision to move especially if it is the family home to which family members have emotional ties.
Other issues to consider are what will happen with the possessions. If the move involves significant downsizing, a family discussion might be the time to decide what to do with the possessions.
An adult child or another family member might need authority to make legally binding decisions regarding the sale if a parent is ill or incapacitated. A durable power of attorney naming the person who will act on behalf of the sell must be done prior to the incapacity.
Also, if multiple family members are involved, it's a good idea to choose a representative to communicate with the professionals – the real estate agent, attorney, and financial advisor. Multiple contacts can create confusion and delays.
Selling a home can trigger significant taxation, especially if proceeds aren't used to purchase another home and capital gains taxes apply. Since every case is different, it's best to contact a tax expert or financial advisor to determine how the sale will affect the seller financially.
"The once-in-a-lifetime over-55 exemption went away in 1997," said Steve Kau, CPA. The over-55 home sale exemption Kau is referring to gave homeowners over the age of 55 a one-time capital gains exclusion. "It was replaced by a law that applies to everyone," Kau explained.
The Tax Reform Act of 1997 raised the amount of proceeds that can be excluded from capital gains to $250,000 per taxpayer. It also allowed for more than one exclusion per taxpayer per lifetime, as long as the seller owned the home for at least two years and the home was the primary residence for at least two years.
For California seniors who want to downsize, property taxes on the new home are a concern. Proposition 13, which limits the amount of property taxes paid, is one of the biggest advantages to owning a home in California. Homeowners who purchased homes when they were significantly less expensive are paying property taxes based on an assessed value usually well below the current market value of their home. Downsizing may mean giving up this tax advantage.
A 55+ homeowner may be able to transfer the tax base once if the move is within the county or to one of the few reciprocal counties. (Alameda County is reciprocal; Contra Costa is not.)
Once a decision is made to move and where, and the family is on board, the next step is to identify experts to go over the logistics and financial aspects. Whether a senior is downsizing or moving in with family, it takes careful planning to make the best decisions for everyone involved.
Realtor Christina Rice is a Certified Seniors Real Estate Specialist (SRES), astute to the financial and emotional challenges senior clients face when they sell a long-held family home.