Many retirees depend on Social Security benefits as a major source of retirement income. According to the Social Security Administration, about 1 in 4 married couples and 2 in 3 unmarried persons get at least half their income from Social Security. With the rising costs of healthcare, housing, and other expenses, Social Security benefits are more important than ever for retirees to make ends meet.
When you sell your house, the proceeds from the sale may impact the amount of Social Security benefits you receive. There are a few ways that selling a house can affect your Social Security:
Capital Gains Taxes
If you sell your house for more than you paid for it and have lived there less than 2 of the past 5 years, you may owe capital gains taxes on the sale. Capital gains from selling your primary residence of up to $250,000 for individuals or $500,000 for married couples filing jointly are exempt from taxes. Any profits above those amounts may be subject to capital gains taxes.
These capital gains are considered part of your income for the year. Higher income can mean that more of your Social Security benefits are taxable. If the capital gains bump your income above the Social Security income limits, you may have to pay taxes on up to 85% of your Social Security benefits.
Loss of Mortgage Interest Deduction
While you owned your home, you were likely able to claim the mortgage interest deduction on your taxes. This reduced your taxable income. Once you sell the home, you no longer have mortgage interest to deduct. The loss of this deduction may increase your taxable income. Again, higher taxable income can result in higher taxes on your Social Security benefits.
Increase in Assets from Sale
If you sell your home for a significant profit, the proceeds from the sale could increase your total assets. Social Security includes your assets when determining your eligibility for benefits and how much you receive. If the proceeds from the home sale boost your assets over the eligibility limits, you could lose some or all of your Social Security benefits.
How Is Your Income Calculated for Social Security Purposes?
To understand how selling a house impacts your Social Security benefits, you first need to know how Social Security calculates your income. Your Social Security income includes:
- Wages from a job
- Net earnings from self-employment
- Taxable amounts of pensions and retirement income
- Interest and dividends
- Rental income
- Capital gains
Some key things to note:
- Social Security does NOT include income from municipal bonds, Roth IRAs, non-taxable pensions and disability benefits, Supplemental Security Income (SSI), workers’ compensation, and veterans benefits.
- Net earnings means your gross earnings minus allowable deductions for things like business expenses.
- Only the taxable portion of your pensions and retirement income counts.
Based on your income and marital status, up to 85% of your Social Security benefits may be taxable. Here are the income limits for 2023:
Income Limits for Individuals
| Income Level | Percentage of Benefits Taxed |
|---|---|
| Less than $25,000 | 0% |
| $25,000 – $34,000 | Up to 50% |
| More than $34,000 | Up to 85% |
Income Limits for Married Couples
| Income Level | Percentage of Benefits Taxed |
|---|---|
| Less than $32,000 | 0% |
| $32,000 – $44,000 | Up to 50% |
| More than $44,000 | Up to 85% |
As you can see, income from all sources, including capital gains from selling your house, can affect how much of your Social Security retirement benefits are subject to income tax.
Does Selling Your House Affect Medicare Premiums?
In addition to potentially increasing your income tax liability, proceeds from selling your home may also affect what you pay for Medicare premiums.
Medicare Part B and Medicare Part D have income-adjusted premiums. The standard premium amounts are increased for higher income beneficiaries.
Your modified adjusted gross income (MAGI) determines whether you pay the standard premium or higher premium. Capital gains, interest, dividends, pensions, and other income are included in your MAGI.
If the proceeds from selling your home increase your MAGI above the premium thresholds, you may have to pay more for Medicare. Here are the 2023 income brackets for Medicare premiums:
Medicare Part B Income Brackets
| Income Level (Individual) | Premium |
|---|---|
| Less than $97,000 | $164.90 |
| $97,000 – $123,000 | $230.80 |
| $123,000 – $153,000 | $329.70 |
| $153,000 – $500,000 | $442.20 |
| Above $500,000 | $460.50 |
Medicare Part D Income Brackets
| Income Level (Individual) | Premium |
|---|---|
| Less than $97,000 | Plan Premium |
| $97,000 – $123,000 | Plan Premium + $12.20 |
| $123,000 – $153,000 | Plan Premium + $32.10 |
| $153,000 – $500,000 | Plan Premium + $51.70 |
| Above $500,000 | Plan Premium + $67.20 |
The income brackets are slightly higher for married couples. But essentially, if the capital gains or other income from selling your home pushes your MAGI into a higher bracket, you will pay more for Medicare.
Can Selling Your Home Affect Medicaid Eligibility?
Medicaid also looks at your income and assets to determine your eligibility. Medicaid provides healthcare coverage for lower-income seniors and people with disabilities.
The proceeds from selling your home are considered a countable asset for Medicaid eligibility. Each state has different limits on how much you can have in assets to qualify for Medicaid. Limits range from around $2,000 to $15,000.
If the cash you get from the sale of your home takes you over the Medicaid asset limit in your state, you could lose your Medicaid benefits. You may need to “spend down” the proceeds from the sale by using the money to pay medical bills or other expenses to get your assets below the threshold.
You may also be able to avoid losing Medicaid by putting the money from the home sale into certain exempt assets like funeral expenses or home improvements for a new residence. Every state has some exemptions that allow you to protect at least a portion of assets from Medicaid spend down requirements.
It’s important to plan carefully when selling your home to avoid a lapse in Medicaid coverage. Consult with an elder law attorney to utilize exemptions and asset protection strategies.
Will Selling Your Home Affect Your Social Security Disability Benefits?
Social Security also provides payments for people who cannot work due to a serious long-term disability. Do proceeds from selling a home impact Social Security Disability Insurance (SSDI) benefits?
The answer is no. SSDI eligibility and payment amounts are based solely on your prior work history and current medical condition. Capital gains, assets, and other income do not affect SSDI benefits.
SSDI differs from Supplemental Security Income (SSI) disability benefits, which do depend on current income and assets. Selling a home could impact SSI eligibility but not SSDI.
How to Minimize the Impact of Home Sale on Benefits
If you want to sell your house but are concerned about the effect on your Social Security, Medicare, or Medicaid, here are some tips to reduce the financial impacts:
Sell Before Social Security Claims
If you sell your home before applying for Social Security retirement benefits, the capital gains will not yet be included in your income calculations for Social Security. You may be able to avoid taxes on your benefits and stay under the income thresholds for Medicare premium hikes.
Claim Social Security Before Medicare
Your Medicare premiums are based on your income from 2 years prior. If you wait until after claiming Social Security to enroll in Medicare, your home sale proceeds may not be counted yet in your MAGI for Medicare purposes.
Reinvest in a New Home
If you use the money from the home sale to immediately purchase a new primary residence, you may be exempt from capital gains taxes on the sale. Consult with your accountant on the timing requirements to avoid capital gains.
Contribute to Retirement Accounts
Putting proceeds from the home sale into traditional IRAs or 401(k)s can reduce your taxable income and help minimize the impact on Social Security benefits. Just be aware of contribution limits.
Delay Cashing the Checks
Hold off on depositing the sale proceeds. Since Social Security and Medicare look at income from 2 years prior, you may be able to avoid counting the home sale proceeds in your benefit calculations by waiting to cash the checks.
Spend Down Proceeds
If you’re on Medicaid, you’ll need to spend excess home sale proceeds to stay under asset limits. Pay off medical bills first and invest anything remaining into exempt assets.
Conclusion
Selling your primary residence can have complicated financial impacts on your Social Security benefits, Medicare premiums, and Medicaid eligibility. With proper planning, you may be able to shelter some or all of your home sale proceeds. Consider the timing of the sale, how you handle the money you receive, and which benefits you currently receive to minimize negative consequences. Consulting with financial and legal advisors can also help you make smart decisions. With the right moves, you can sell your house without derailing your retirement income sources.
