Using Your Home for Retirement Income

Your home may be your single largest asset. However, this asset, as grand as it may be, is highly illiquid — you can’t easily use it as a source of income. There are certain strategies that can help you transform this asset into current income.

Sell your home

Maybe it’s time to downsize or relocate. This can be an opportunity to transform your home into a significant source of retirement income. When you sell the home, capital gain up to $250,000 ($500,000 on a joint return) may be tax free, with any additional gain taxed at favorable rates. Use some of the proceeds to buy a smaller home or simply rent a new place. Either way, use what remains to create an income-generating portfolio of securities.

Say that after tax you net $500,000 from the sale of a home. If you can invest this money to earn 8% a year, you’ll receive an annual income of $40,000. If you rent a home for $1,500 a month, you’ll have enough from this income to pay the rent and $22,000 for other expenses.

Rent a portion of your home

Widows, empty nesters, and anyone else who has more room than needed in the home can gain companionship plus income by taking in a boarder. The tenant pays you rent that you can spend as retirement income.

Of course, the rental income you receive is taxable, but it can be offset by rental expenses, such as advertising, maintenance, and utilities related to the rental portion of the home.

If the expenses are greater than the rent, you can even create a tax shelter. As long as your adjusted gross income is under $100,000, you can write off up to $25,000 of net rental losses-effectively offsetting wages, interest income, and other income by the net rental losses.

To learn more about shared living, visit the National Shared Housing Resource Center.

Get a reverse mortgage

If you don’t want to leave your home but need cash now, a traditional mortgage probably won’t help. With this type of mortgage, you must make monthly repayment-the very thing you can’t afford to do.

However, if you’re at least 62 years old, you might consider a reverse mortgage. The lender gives you cash now-in a lump sum or a line of credit you can tap at will. You don’t have to make any payments while you are in the home. If you move or die, the lender sells the home to recoup the outstanding balance (principal plus interest) and your heirs get whatever is left, if any.

To learn more about reverse mortgages, visit the National Center for Home Equity Conversion.