Question:

I am a late starter to retirement planning. Should I count my house or the equity in my house as an asset in my retirement plan?

If you are playing catch-up on your retirement planning, you need to maximize every asset you have to make retirement a reality.

In general, financial planners don’t count the equity in your home when constructing a retirement income plan. Practically speaking, you need a place to live! So financial planners count it as a personal asset, even though it’s a large part of your net worth.

Late starters to retirement planning need to think differently. Your home can be leveraged to help enhance your retirement plan.

Home equity can be tax-free

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Your home is a special asset in the eyes of the IRS. According to IRS Tax topic 701, as of February 2018 (which means this remained under the new tax law), if you are married filing jointly, you can exclude up to $500,000 in gains from income taxes on the sale of your residence. (If you file as an individual, you can exclude up to $250,000 in gains.)

That’s right. You can buy a house, live in it, sell it, and pay no taxes on up to half a million dollars. You just have to pass an “ownership test” and a “use test.” In other words, you have to own the home and have lived there two out of the past five years.

For example, if you bought a home for $250K, lived in it for at least 24 months out of a five year period, and sold it for $750K, the gain of $500K would be free from income tax. Pretty sweet!

How to turn home equity into retirement income:

1. When you retire, you can downsize and invest the proceeds.

Once you stop working, sell your home, buy something smaller and less expensive, then take your gains from the sale and invest them to provide an income stream.

A smaller place can be less expensive to maintain, too. Property taxes may be lower on a less expensive home, since they are usually based on a percentage of the value of the property. Heating or cooling a smaller space can be cheaper, too.

Alternatively, you could rent! The downside of renting is having to write a check to your landlord every month. The upside is you invest the entire proceeds of your home sale to work for you.

2. Sell your house and move to an inexpensive place.

Check out the Forbes 2018 Best Places To Retire list and find your bliss. Don’t just look for tax benefits — for example, states such as Nevada and Texas have no income taxes — but also pick a place where you can live well on the cheap. College towns, for example, can bring a whole host of benefits to retirees nearby.

Whether you buy a smaller place or rent, your money can go further in less…