House rich and cash strapped is a common predicament for many older homeowners — particularly in pricy housing markets with high property tax rates.
By Douglas Keister
In a recent analysis by Zillow and Thumbtack, property taxes, utilities and homeowners insurance added up to $6,327 a year for the median-priced U.S. home, with property taxes likely making up the lion’s share of that cost. For retirees living on a fixed income, the ability to stay in their home often comes down to what they pay in property taxes.
For many there is another option: Defer them.
Roughly two dozen states, including California and Texas, have property tax deferral programs that are available to older homeowners who want to put off paying real estate taxes for as long as they remain in their home. (Owners who have mortgages will typically need approval from their lenders.) When program participants do eventually sell or pass away, the state claims the balance of what they owe, plus interest, from their home equity.
“For most people, their house is their major asset, and to be able to tap some of that equity” — that is, by using it to cover current tax burdens — “could greatly improve their comfort in retirement,” says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Yet many of these programs go underused; only about 10% of eligible homeowners in Oregon, for instance, participate in the program, according to a Boston Globe story on the deferrals. Many state programs have income limitations — but unlike property tax exemptions, which are typically reserved for low-income households and offer only modest relief, some of the deferral programs are open to retirees with relatively healthy retirement incomes.
In Minnesota, for example, the Senior Citizens Property Tax Deferral Program is open to homeowners age 65 older with household income of $60,000 or less. In Washington, owners age 60 and older qualify with combined disposable incomes of $45,000 or less.
The Boston College center has proposed expanding property tax deferral programs in Massachusetts by, among other things, increasing or removing income limits. “In Massachusetts, it would give the average homeowner about $4,000 a year, which is enough to take some of the edge off,” Munnell says.
How to Use a Property Tax Deferral
If a deferral program sounds tempting, start by searching your state’s treasury office or contacting your local appraisal office to see if there are any deferral programs available in your state (or municipality). You can also search for property tax relief programs in the Lincoln Institute of Land Policy database.
If there’s a program available, it’s important to think through all of the considerations. What you’re essentially doing is borrowing the amount of tax that you’d otherwise owe, and securing it with your home’s value. So, typically, program administrators will put a lien on your home — similar to any home equity loan — and charge interest, which accrues over the life of the loan.
In Oregon, which is the oldest such program, individuals who are 62 and older who have lived in and owned their property for at least five years and meet other criteria — including 2018 household income below $44,000 and net worth of less than $500,000 — may apply for property tax deferral. If they are approved, the program will put a lien on their property equal to the estimated cost of future property taxes, plus accrued interest of 6% annually.
Although participants can exit the program — and pay those deferred taxes — at any point, most retirees go in with the idea that they will defer the expense until they sell the home, in which case the balance is subtracted from the equity, or pass away, in which case their heirs will owe the amount due.
“It’s the same principle as a reverse mortgage, where the money you owe will be deferred until you die or sell,” says Ed Slott, a certified public accountant and retirement expert based in New York (where no such deferral is available).
In most cases, however, the decision to defer taxes isn’t nearly as drastic as reversing a mortgage. “It is a way to get some equity out of the house to defer expenses, but it’s much easier to do,” says Munnell. It’s typically a lot cheaper as well, she adds.
Even so, for many retirees there is still a fear and a stigma of putting a lien on their homes. “There is an emotional resistance,” Munnell says. “It’s important for people to know that they won’t be thrown out of their home and that in most cases will have some home equity left over.”
Some seniors who want to leave the house to children or other heirs may also worry about the burden of accrued interest. That said, retirees who truly need the extra wiggle room in their budgets should put their own needs before those of their heirs, Slott cautions. “Many people worry too much about their beneficiaries,” he says. “But if you don’t have enough to live on, there isn’t going to be enough for them anyway.”