Can Selling Your Home Affect Your Future Medicare Premiums?

The Medicare Two-Year Lookback

Social Security generally determines whether you owe an Income-Related Monthly Adjustment Amount, commonly called IRMAA, using income information from a federal tax return from approximately two years earlier.

That means a significant financial event today could potentially affect Medicare Part B and Part D costs later.

This can be especially important for homeowners who are approaching age 65.

For example, a homeowner selling at age 63 could potentially have taxable income from that sale considered when future Medicare premiums are determined.

It Is Not the Sales Price or Your Check at Closing

This distinction is extremely important.

Medicare does not simply look at:

• The price your home sold for
• The amount of equity you had
• The size of your check at closing
• The amount used to pay off your mortgage

The concern is whether the transaction creates taxable gain that becomes part of the income used to calculate your MAGI.

That amount can be very different from your sales price or your net proceeds.

Your Primary Residence May Qualify for a Significant Tax Exclusion

Under current federal tax rules, qualifying homeowners may generally be able to exclude a substantial amount of gain from the sale of a primary residence.

Eligibility depends on IRS requirements, including ownership and residence rules.

If your gain is fully covered by an available exclusion, the sale may have little or no taxable gain associated with the appreciation.

Homeowners who purchased many years ago, experienced substantial appreciation, used part of the property for rental or business purposes, or have other circumstances may have additional tax considerations.

Your Taxable Gain May Be Much Less Than You Think

Your taxable gain is not necessarily calculated by simply subtracting your original purchase price from today's sales price.

Certain qualifying improvements made to the property over the years may increase the home's adjusted tax basis.

Examples may include qualifying costs associated with:

• Room additions
• Kitchen renovations
• Bathroom renovations
• New roofing
• HVAC systems
• Decks or patios
• Driveways
• Certain landscaping improvements
• Electrical or plumbing upgrades
• Other permanent capital improvements

Certain selling expenses may also affect the gain calculation.

This is one reason homeowners who have owned their property for many years should begin gathering old receipts, invoices, settlement statements and improvement records before the home is sold.

What If You Sell in One State and Buy Another Home?

This can be especially important for homeowners relocating to Georgia from higher-priced housing markets such as California, New York or other parts of the country.

Selling your current home and using the proceeds to purchase another primary residence does not automatically prevent taxable gain from affecting your Medicare income calculation.

Medicare generally looks at the income reported on your federal tax return. It does not simply look at how much of your home-sale proceeds you reinvested into your next home.

The good news is that if most or all of the gain qualifies for the primary-residence exclusion, the potential effect on Medicare may be substantially reduced—or there may be no taxable home-sale gain affecting MAGI at all.

The key is to determine the potential taxable gain before deciding when to close the sale, rather than assuming that purchasing another home will offset the gain.

Could the Sale Affect Medicare?

Possibly—but not necessarily.

If taxable gain from your home sale increases your MAGI above an applicable Medicare IRMAA threshold, you may be required to pay an additional amount for Medicare Part B and, if applicable, Part D prescription drug coverage.

Income thresholds and Medicare premiums can change from year to year.

That is why homeowners approaching retirement should avoid making a major real estate decision based solely on an old Medicare income chart.

Instead, ask your tax or financial professional to review the rules that apply to the specific year in which you are considering selling.

Your Home Sale May Involve More Than Real Estate

Depending upon your circumstances, your planning team might include:

Each professional has a different role.

My role is to help you understand the real estate side of the decision, provide realistic information about your property's potential value and selling costs, and coordinate the transaction around the strategy you and your professional advisors determine is best.