A house is likely the largest single investment you'll ever make, and as you enter retirement – a time by which most mortgages have either been paid off or are getting close to being paid off – it can represent a sizable asset. Deciding if, when and how to tap into that asset during retirement can be difficult. With financial and emotional factors to consider, should you really sell your house to retire? Here’s a look at the pros and cons – and other options.

A Boost to Retirement Accounts

Only 21% of Americans are very confident they will have enough money to retire comfortably, according to the 2016 Retirement Confidence Survey from the Employee Benefit Research Institute. For some, it’s a matter of being house rich and cash poor – a situation where you have lots of equity in your home but little cash left over to cover your expenses during retirement.

Depending on your situation, selling your home could give your retirement accounts a welcome – if not necessary – boost. And remember, thanks to the Taxpayer Relief Act of 1997, you can sell your home and make a profit of up to $250,000 ($500,000 if you’re married) without owing any capital gains taxes. (See also Need Retirement Income? Sell Your House!) If you decide to sell, you have several options when it comes to putting the proceeds to use, including:

  • Pay cash for a new (less expensive) house. Any money you have left over you can invest to provide a steady stream of income during your retirement years, use to pay down other debts and put towards your daily living expenses during retirement.
  • Make a down payment on a new house. This option leaves you with more money now to invest, pay down debts and cover living expenses, but you’ll also have a monthly mortgage payment.  
  • Forget homeownership and rent instead. This option leaves you with the most cash to invest, pay down debts and cover living expenses, but you’ll be stuck paying rent – a monthly expense that may rise every time you renew a lease. A bonus, though, is that you’ll save money on repairs and maintenance. (For more, read Retirement Living: Renting vs. Home Ownership.)

If you need income but prefer not to sell quite yet, another option is to rent out your home and use the income to downsize. One advantage to this approach is that you may be able to deduct expenses associated with the property, including repairs, maintenance and insurance. Top Tips for Successfully Renting Out Your Home will help you get started.

More on Maintenance

As every homeowner knows, it takes a lot of time and money to keep a home in good condition. As your home gets older, it’s likely to need more and more maintenance – everything from replacing the furnace and windows to putting in a new roof and septic system. These ongoing costs can make holding on to a home impractical – from both a financial and emotional perspective.

One option is to downsize to a home that requires less maintenance due to its smaller size and/or age. A condominium can be a particularly attractive option if you want to remain a homeowner while limiting your maintenance responsibilities: You take care of your unit, and the condo association is responsible for the maintenance and repair of all common areas, including basements, elevators, halls, lobbies, HVAC systems, community facilities and the land on which the condo is built.

The other option is to rent. Although many people are averse to renting – and feel like it equates to throwing money away – it can make financial sense once you crunch the numbers. One thing to keep in mind, however, is that rent costs typically go up – something you won’t have to deal with if you own your home already, or if you’re making a consistent mortgage payment.

Consider Your Heirs

Another consideration is whether you prefer to leave your heirs real estate or some other type of asset – such as stocks, bonds, mutual funds and annuities. The tax consequences vary, so it pays to think through your options carefully.

If your estate is below the federal estate gift and estate tax exemption ($5.45 million for 2016), for example, your heirs can avoid capital gains tax on the appreciation to date since your home’s tax basis will be stepped-up to the fair market value when you pass away (the so-called stepped-up basis rule). So even if you bought your home for $100,000 and it’s now worth $500,000, your heirs’ tax basis in the house will be the difference between the value on the day you pass away ($500,000 in this example) and the sales price – say $510,000 – should they decide to sell.  

An example of a “bad” asset to pass onto to your heirs is a depreciated security. If you bought stock XYZ for $40,000 and it’s now worth $28,000, you can sell it now and claim a $12,000 capital loss deduction. If you die holding onto the depreciated security, however, the unrealized capital loss is no longer an option. Again, tax consequences vary, so consult with a financial planner to find out what makes the most sense for you, based on your preferences, goals and current financial situation. 

Staying Put

Many older adults choose to stay put – or “age in place” – during retirement, either out of necessity or by choice.  If it’s out of necessity, it often comes down to money. In many markets, real estate prices are still trying to make a comeback following the 2008 financial crisis, leaving many older adults with a hard decision: remain in their home or offload it for a lot less than they'd anticipated.

Even if your home has retained its value or appreciated, it can make financial sense to stay put if you are mortgage-free, have low property taxes, and expect minimal repair and maintenance expenses. Of course, each situation is different, and you’ll have to do some number crunching – and consider your preferences – to decide if staying put is the right choice for you. Reasons to Stay Put During Retirement will help you review your choices.

The Bottom Line

You have to live somewhere during retirement, whether it’s in your existing house, a downsized home or a rental. Usually, there are financial reasons behind the decision to sell or stay in your home, but there are likely nonfinancial considerations as well. It may be difficult to leave the house where you raised your family, for example, or you could have spent years creating a garden you don't want to leave. Or, perhaps you just don’t like the prospect of going through a move.

No matter what you're feeling, it’s important to consider all options carefully and consult with a financial planner if you have any questions or concerns or if you just want a second opinion. You may also be interested in Should I Sell My Home When I Retire?