When it comes to real estate, the boomers are still booming.
According to the National Association of Realtors, baby boomers overtook millennials as the largest generation of homebuyers in 2022. They accounted for 39% of all properties purchased last year.
But many other boomers are wondering what to do with the homes they already have. Some might want to sell and downsize. Others might want to sign their property over to their children while they’re still alive. Others might want to age at home and then hand their houses down after they’re gone.
No one choice is right for every boomer, but without proper planning — a whole lot can go wrong. Let’s review some ways to avoid that.
Before you start weighing your options, consider your family dynamic, financial needs and goals for the future.
“Determine if keeping the properties aligns with your long-term plans and if the potential income or equity appreciation outweighs any ongoing expenses or maintenance costs,” said Denis Smykalov of Wolsen Real Estate. “If the market is favorable and you anticipate significant returns by selling, it might be worth considering selling one or more properties.”
Tax considerations will be discussed further down the page, but if you’re planning on leaving property to your children, you need to talk to them before you talk to an accountant.
“Discuss with your heirs their interest in inheriting and managing the properties,” said Smykalov. “Determine if they have the financial means, time and inclination to take on the responsibilities associated with property ownership. Open communication can help you make an informed decision.”
Dennis Shirshikov, head of growth at real estate investing company Awning, outlined the five most common options for what boomers can do with their properties:
- Leave it in a will: “Including real estate in a will can provide clear instructions on how the property should be transferred and distributed among heirs,” said Shirshikov.
- Create a trust: “Trusts can offer additional benefits, such as avoiding probate and providing asset protection,” said Shirshikov.
- Give it as a gift: “The boomer can choose to gift the real estate directly to their heirs during their lifetime,” said Shirshikov. “This can help reduce potential estate taxes and allows for a smoother transfer of ownership. However, it’s essential to consider gift tax implications and consult with a tax professional to ensure compliance with relevant laws.”
- Create a family limited partnership (FLP): “Establishing an FLP allows the boomer to retain control over the property while gradually transferring ownership to family members,” said Shirshikov. “This structure can provide asset protection, tax benefits, and flexibility in the transfer process.”
- Conduct a sale with seller financing: “Instead of an outright transfer, the boomer can sell the property to their heirs using seller financing,” said Shirshikov. “This approach allows the heirs to assume the mortgage payments, providing them with an opportunity to own the property while minimizing upfront costs.”
What Did You Pay for the House and What Is It Worth Now?
The biggest consideration when deciding whether to sell your house or leave it to your heirs is how much it has appreciated since you bought it.
“Upon the sale of a primary residence, the first $250,000 of gain is excluded from a taxpayer’s taxable income,” said John M. Jennings, president and chief strategist of St. Louis Trust & Family Office, a $15 billion wealth management firm. “If the gain is greater than the exclusion amount, the taxpayer will owe capital gains tax on the gain in excess of the exclusion. In contrast, if the homeowner doesn’t sell the house during life, at death the house will receive a ‘stepped-up basis,’ meaning that all gain will be wiped out.”
Jennings gave the following example to show just what’s at stake when selling a heavily appreciated property.
“For example, if Carl, a single taxpayer, bought his house for $600,000 and sells it during his life for $1.25 million, he’ll pay capital gains tax on $400,000 of gain — $1.25 million less the $600,000 basis, minus the $250,000 of exclusion,” he said. “If, instead of selling the house, Carl owns the house at his death, his heirs can sell the house without incurring any capital gains tax.”
If you sell a home, you pay the tax. But if you gift it while alive, the recipient gets stuck with the bill.
“This is because the tax basis, the value used to calculate how much of a capital gain or loss you have on an investment, gets carried over from the person giving the gift,” said Nicholas B. Creel, a realtor and assistant professor of business law at Georgia College and State University. “This means that you essentially step into the shoes of the person who gave you that gift. So if they bought the property for $100,000 and it is now worth $1 million when they gifted it to you, you would be on the hook for a $900,000 capital gain if you immediately sold that property.”
Bu if you inherit the property instead, your tax basis “steps up” to its value at the time you received it.
“So if we go back to the above example, your tax basis would be $1 million instead of $100,000 and you could immediately sell that property without incurring a dollar in capital gains,” said Creel. “In most instances, you are probably going to want to pass down your real estate to your heirs at death rather than gifting it to them now, as this strategy usually minimizes the amount of taxes they’ll have to pay if and when they later go on to sell that property.”
What if I Own More Than One Property?
Those with second homes and investment properties should plan for a little more planning.
“If boomers have multiple properties, the decision of whether to hand them down to heirs or sell them can become more complex,” said Shirshikov. “Each property should be evaluated individually, taking into account factors such as location, market conditions, maintenance costs and the overall financial situation of the boomer.”
In some cases, it might be beneficial to sell one or more properties to consolidate assets and simplify the estate planning process.
“This can provide liquidity and flexibility in managing their wealth,” said Shirshikov. “On the other hand, if the properties are generating steady income or have significant appreciation potential, keeping them and passing them down to heirs could be a viable strategy. It’s crucial to consider the financial implications of maintaining multiple properties, including property taxes, insurance, maintenance costs and potential rental income.”
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