If you ever question the value of owning property, talk to retirees who find themselves $100,000 richer because of property investments they made decades ago.
That’s the kind of gain some retirees enjoy after selling homes they bought when they were younger and then relocating somewhere cheaper. The typical homeowner saved nearly $100,000 in 2019 by selling their primary home and moving to an area with lower home prices, according to a new study from Vanguard Group.
In some cases, the payoff is even bigger. Vanguard used the example of an individual homeowner who purchased a primary residence in Boston for $170,000 in the early 1990s, when she was still in her mid-30s. Today, that same home would be valued at around $500,000, based on the current housing market.
If the homeowner retires and sells that home today, in her mid-60s — and then buys a smaller, less expensive home in Florida — she would be able to unlock $200,000 of the capital gains on her Boston home. Even after taxes and other fees, she would still have a substantial amount of money to help fund her retirement.
“Downsizing may be an important channel to shore up retirement funding,” Vanguard said in the study.
Just keep in mind that while this strategy works for many retirees, it doesn’t work for everyone. The amount of money you might get in retirement from selling your home depends on numerous factors — including where you live.
The Vanguard study found that retirees in the best position to take advantage are those who own homes in regions where home values have appreciated rapidly over the past few decades, such as the West Coast, Northeast and select states like Arizona, Colorado, Florida, Nevada and Utah. Selling homes in those regions and moving some place cheaper could provide a big financial windfall.
In contrast, if you own a home in Midwestern or Southeastern states like Alabama, Mississippi, Nebraska and South Dakota, you might end up losing money on the transaction. That’s because home values in many of these states have not risen nearly as rapidly as elsewhere in the country.
Another thing to consider is the impact moving would have on your Social Security benefits. As Motley Fool noted, your benefits could take a big hit if you move from a state where Social Security benefits are not taxed to one where they are taxed. The vast majority of states — 38, plus the District of Columbia — do not impose state taxes on Social Security income.
One state, Connecticut, allows retirees whose adjusted gross income is less than $75,000 for a single filer and $100,000 for joint filers to deduct most or all of their Social Security income. Those who earn above these thresholds can still deduct 75% of their Social Security income.
In Colorado, residents 65 and older can fully deduct Social Security benefits from their state income taxes, effective with the 2022 tax returns they file in 2023, according to AARP. Previously, people in this age group could deduct up to $24,000 in retirement income — including Social Security payments — but a 2021 state law repealed that cap. Younger beneficiaries might still owe state taxes on a portion of their benefits, however.
Other states that tax Social Security benefits, even if only above a certain earnings threshold, include Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia. If you move to one of these states from a state where Social Security benefits are not taxed, be prepared to see your benefits shrink.
