By Dan Rafter | mortgageloan.com
Most Americans will need some type of long-term care in their old age. For those moving to a senior living facility that provides some level of care — from weekly housekeeping to daily assistance or dementia care — selling their home to fund senior living and care may be their best choice.
Selling a home to pay for such care is a conversation that more people will likely be having in the coming years. Even refinancing a mortgage can help lower costs for people who want to stay in their homes.
About 70 percent of people over age 65 will require at least some type of long-term care services, according to the U.S. Department of Health and Human Services. That population is projected to grow from 47.8 million today to 74.1 million by 2030, according to the Census Bureau.
Only 7 percent of people have long-term care insurance, so a home is often used to pay for moving to senior care or downsizing, says Chris Seman, president of Caring Transitions, a senior relocation service based in Cincinnati.
“People are doing this younger and younger,” says Andy Smith, senior vice president of financial planning at Financial Engines in Indianapolis. Smith says his clients are downsizing in their mid- to late 60s, and moving into senior facilities in their 70s.
Nursing facility costs should be built into a long-term financial plan, he recommends, along with a 6.5 percent rate of inflation for healthcare costs.
“Build this into your long-term plan, talk to your advisor about this, as long as you’re healthy,” Smith says.
How much senior housing is your home worth?
Part of a financial plan discussion can include how much your home is worth and how much it will buy you in the area you want to retire in.
A study by the real estate brokerage Redfin and the senior living referral service called A Place for Mom looked at how many years of senior housing a home sale is worth in 162 cities.
Location, equity and type of care needed affected how much a home sale can help with senior housing and care costs, the study found. Not surprisingly, homes in expensive real estate markets bought the most senior care, with eight of the top 10 areas in California.
San Francisco led the list, with a home sell there paying for either 22 years of independent living, 16 years of assisted living or 13 years of memory care for seniors with cognitive impairment.
The study had another interesting point: Selling a home pays for more years of senior living in affluent cities. The reason is senior living costs don’t vary as much geographically as home prices. Homes may be much more expensive in California, but senior living facilities aren’t.
Living on the coast can pay off later in life, says Ben Hanowell, data scientist for A Place for Mom.
“You could really set yourself up for a really nice retirement, even if you have 50 percent equity in your home,” Hanowell says.
A home sale can have tax implications at any age. Selling when you’re older and likely have paid off the home loan can create more of a tax burden if your profit is too high.
But that’s unlikely for most people because of the tax laws, says Smith, the financial planner.
For a married couple filing their taxes jointly who are selling their home, a profit of up to $500,000 is tax free if they lived in the home for any two of the last five years, he says. For an individual, the cap is $250,000.
Ninety-nine percent of people are in such situations, Smith says. “That kind of takes taxes off the table for a lot of people,” he says.
For anyone who does have profits on a home sale above those amounts listed above, they would pay long-term capital gains, Smith says, though it wouldn’t be too high for most people.
For someone in a 10-15 percent tax bracket, there isn’t a long-term capital gains tax. But someone in a 25-38 percent tax bracket would pay a 15 percent tax on such capital gains, Smith says. For a 39.6 percent tax bracket, the tax rate would increase to 20 percent.
Other financial issues
A home sale will mean no longer having to pay property taxes if the seller doesn’t buy a smaller home. Home insurance costs can also drop.
Some states have better tax rates than others. Alaska, Arizona, Wyoming, Georgia, Nevada, Mississippi, South Carolina and Delaware are a few states that are tax friendly, says Seman, the senior relocation service executive.
If their home isn’t paid for in full and they’re retiring with a mortgage, seniors should compare the savings of selling and having a lower monthly payment elsewhere for housing versus the cost of remodeling their home to meet their needs later in life, Seman says.
Refinancing a mortgage at a lower interest rate or getting a home equity loan or line of credit could make staying in their current home and remodeling worthwhile.
For seniors selling homes that they have lived in for 30 years or more, they should consider that their older homes may need updating and repairs to make them more saleable, Seman says. Half of homes sold by people 65 and older were built before 1975, according to the U.S. Census.
Older homes typically have lower market value, with the median value of homes owned by older adults 8 percent lower than other homes, the Census found.
One of the top things to look out for, Seman suggests, is to not make a decision on senior housing in a rush based on immediate health problems.
“Most people aren’t prepared for any of this,” he says. “Most people haven’t given this any thought.”
Having that discussion early could make old age a bit easier.