This property tax strategy can help free up income in retirement
Many retirees are struggling to drum up adequate retirement income amid longer life expectancy, high health-care costs and low interest rates.
Property tax deferrals, whereby you put off paying the taxes on your home, are available in certain cities and could free up additional income.
But you want to be sure that it makes sense for you and that your heirs understand they may have to settle your debts after you die.
If you want to free up more income in retirement, you may want to consider one strategy that lets you put off paying your property tax bill.
Property tax deferrals allow you to put off paying your property taxes until you die or sell your house. At that time, your local government is reimbursed the total amount of the taxes plus interest.
The idea is not widely implemented. But it has caught the attention of the Center for Retirement Research at Boston College, which published a research paper on the strategy last year.
That is because many individuals face low levels of income in retirement. The typical working household ages 55 to 64 with access to a 401(k) plan had just $135,000 in retirement assets in 2016, according to the research. That amounts to just $600 per month.
Other factors contributing to that retirement-income shortfall include longer life expectancy, high health-care costs, low interest rates and fewer pensions. In addition, Social Security income does not go as far, and Medicare premiums are rising.
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One area where many individuals have money tied up is in their homes.
That has led some to consider a reverse mortgage, whereby you do not have to repay the mortgage while you are living in the house. Interest and fees are added to your balance, which does not have to be repaid, until you move or die.
For some, deferring property taxes may be a more attractive option, according to the Center for Retirement Research. That is because the amount you postpone is less, which means there is less to pay back in the end. Property tax deferrals also come without the complexity and upfront costs of reverse mortgages.
The average older homeowner in Massachusetts, for example, may save approximately $4,000 a year through property tax deferrals.
Eligibility
A total of 24 states currently offer some seniors the ability to defer paying their property taxes until their homes are sold or they die, according to the research.
In states such as Massachusetts, only certain towns — 310 out of 351 total — offer these deferrals. But the terms — particularly the interest rates — can vary.
Many Massachusetts residents are unaware that they are eligible to put off their property taxes, which has led to low participation, according to the Center for Retirement Research.
Another hurdle that prevents them from partaking in these programs is income restrictions. Massachusetts, for example, limits maximum gross income to $20,000. But local governments are able to raise that to $57,000.
Out of 456,749 homeowners in Massachusetts, just 918 had property tax deferrals in 2016.
"It's important for a state like Massachusetts, because it's such a high-tax state," said Alicia Munnell, director of the Center for Retirement Research. "It's sort of kept as a state secret, because right now it diminishes that tax revenues that the cities and towns get."
Regardless of the state where you reside, you generally have to fulfill certain requirements in order to take part in a property tax deferral program.
The initial eligibility age can range from 62 to 67 years, according to the Center for Retirement Research.
There is also usually a certain amount of time you have to have been a resident, which can range from one to 10 years.
Participation may also be limited based on income and property value. And the interest rates can vary.
What to consider
"Before you get excited about this, check your local rules, because it's going to vary pretty widely around the country," said Tim Steffen, director of advanced planning at Baird Private Wealth Management.
While Minnesota offers a variable rate with a maximum of 5 percent, other states charge more, according to Steffen. Oregon, for example, comes in at 6 percent, California at 7 percent and Texas 8 percent.
"That's an expensive loan you're getting in Texas," Steffen said.
You should ask yourself if you can earn more by investing that money instead of paying your property taxes immediately.
"There's a simple math question that comes into it," Steffen said.
A reverse mortgage might be a better option, particularly if it offers more money and more control over your income, Steffen said. At the same time, a reverse mortgage will come with more requirements, more paperwork and a more complicated process overall.
Taking on both a property tax deferral and a reverse mortgage involves too much risk, because it puts too many liens on the home, according to Munnell. That prompted Oregon to stop allowing individuals to sign up for both.
One key point to remember about property tax deferrals is that this is not free money.
"It's a deferral, so it's effectively a loan," Steffen said.
If you do decide to defer your property taxes, pay attention to how this will affect your heirs.
"You don't want your heirs to be surprised that Mom and Dad are 10 years in arrears on their property taxes and they sell the home and have to make all that back up plus interest," Steffen said.
Start by explaining to your heirs exactly what you are doing, said Jeffrey Levine, CEO and director of financial planning at BluePrint Wealth Alliance.
That way, if your heirs want to hold on to the residence after you die, they can plan ahead and set aside money to repay the deferred taxes rather than be forced to sell the home, Levine said.
As with every other financial decision, make sure you are not taking on too much.
"If the property taxes really are a financial burden for you, maybe an alternative would be to downsize the home," Steffen said.
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