Parents always want what is best for their children, while also balancing what is best for their own long term financial security. That doesn’t change if that parent also happens to be a homeowner in retirement. Unfortunately, a number of economic headwinds are preventing adult children from achieving their own financial goals, especially home ownership.
Millennials and even some older Gen Z members are facing the worst housing affordability environment in more than 40 years, according to recent findings from Ned Davis Research*. This has been due to a number of factors, most notably the lack of supply from under-construction of homes following the financial crisis of 2008-2009 in the U.S.
Additionally, the cost of home ownership has also been stymied by high mortgage borrowing rates. According to Freddie Mac, the average 30-year mortgage bottomed out at 2.65% in January of 2021, and now sits closer to 6.88% as of April 2024.
The Parent Trap
Many of the millennials’ baby boomer parents who own homes are benefiting from these trends. They have seen their home values appreciate over 29% from the start of the Covid pandemic in early 2020 according to the U.S. Department of Housing and Urban Development (HUD). Boomers who carried mortgages into retirement have had the opportunity to refinance debt at low rates.
Longtime homeowners may also be “rate-locked” into their existing homes — unwilling to sell because they’re unlikely to match their current low mortgage rate should they wish to finance a new home. This further hampers the market supply in the market, even if boomers wish to downsize.
Although housing costs may have less of an impact on many boomers than on their children, boomers are staring at their own potential crisis: healthcare costs. Fidelity’s Retiree Health Care Cost Estimate suggests that a 65-year-old couple in 2023 will need approximately $315,000 to cover out-of-pocket healthcare costs in retirement. This does not include expensive long-term-care provided by home health aides or an assisted-living or skilled-nursing facility. So, retirees should be mindful of their financial resources, including recent higher home values.
Gifting or Selling the Family Home
Retirees may consider gifting or selling their home to their adult children who are struggling to access to the housing market, If the retiree has seen good appreciation on the home and other financial assets, this may appear to be a “win-win” opportunity for them and their family. That said, liquidity needs and taxes must be taken into consideration before transferring the home via sale or gift.
Homeowners typically receive an exemption on a capital gain on the sale of a home via Section 121 of the IRS code. For married couples who meet residency eligibility requirements, this exemption is $500,000 of gain in excess of the cost basis of the home.
Gifting
Let’s say a retired couple purchased a home many decades ago for $100,000, added $50,000 of capital improvements and plans to sell or gift the home now valued at $600,000. If the couple gifts their home to a child, that child would carry over the original basis of $150,000 ($100,000 + $50,000), maintaining an imbedded gain of $450,000.
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But this may not be the best option from a financial point of view. Gifting the home to a child would most likely require the filing of the gift tax return because the value of the home would be well in excess of the 2024 annual gifting limits of $18,000 per person. The cost basis the child receives is also much lower than what they would receive if they inherit the home upon the owner’s death; in that case, the cost basis would be stepped up to its date-of-death value.
Selling
Let’s say, though, that the parents do want their child to enjoy the home today rather than waiting until they die to give it to them. If the retired couple sells the home to their child instead of gifting it, they could use the Section 121 exemption on their gain. And they can sell it at a discounted rate, if they’d like — but there are some things to consider.
Let’s assume the retired couple from the example above wants to sell their $600,000 home to their child for a more affordable price of $400,000. While they are not precluded from doing so, the IRS would most likely look at this transaction executed below fair-market value as part sale, part gift. The same thing would happen if the couple decides to maintain ownership of the home but rent it to the child for below the fair market value. If fair market rent is $3,500 per month but the couple decides to rent to a child for $2,000, they would need to account for the rental income and the gift.
Assessing the Need of the Home as an Asset
Boomer retirees who have seen considerable home appreciation also need to analyze how their home equity can play into their financial plan to fund future retirement spending goals. This is particularly important when thinking about future unexpected care and housing costs. Gifting a home outright to a child is most often irrevocable, so the retiree needs to think through how much they have in other resources to fund their retirement living expenses. Longevity and inflation are two key components they should take into consideration.
Unless the retiree and child are emotionally attached to the family home, an optimal consideration might be a non-related sale at full market value followed by partial gift of the net proceeds.
Let’s say our retired couple lists their home on the market for $600,000, and gets multiple offers over asking price. If they net $650,000 on the sale, they would still be within the gain exclusion range. They could allocate $450,000 toward a 55+ community purchase or a continuing care retirement community (CCRC) entry fee, and still have $200,000 left over to gift to their child (again, a gift tax filing would most likely be necessary.)
Not only would the retired couple receive resources from their home sale, they’d be able to give their child a meaningful down payment to access a challenging housing market. This strategy also broadens the adult child’s housing options beyond the family home.
The Bottom Line
Retirees may be motivated to help adult children in a tough real estate market and may feel empowered to do so through the higher equity in their own homes. But gifting a home outright needs to be thought through carefully. A real estate attorney and accountant should be consulted to transfer title and/or calculate tax implications. Additionally, retirees should not forget that their appreciated home can add to their own financial security for many years to come.
Jim Ciprich, CFP, MBA, is a wealth advisor with Corient Private Wealth LLC in Morristown, N.J. He serves a broad range of clients and focuses on retirees considering care and housing options. Jim founded and co-chairs his firm’s Senior Solutions specialty practice. He also serves on an advisor counsel to the MIT AgeLab and has served as an adjunct professor at Fairleigh Dickinson University in its CFP® program. Jim is the past president of his local estate planning council. In a prior career, he was an award-winning marketing executive in the music industry. The information in this article is for educational purposes.
