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Tapping home equity though property tax deferrals

Like reverse mortgages, tax deferrals for seniors free up cash and support aging in place

Retirees are not going to have enough cash in the bank to support their standard of living, and it’s a growing problem.

This is according to the Boston College Center for Retirement Research, which has long proposed home equity use – and reverse mortgages – as a means to generate retirement income.

Now, the center is floating another idea to help seniors find financial security in retirement: an expanded property tax deferral program.

With a property tax deferral, the state or local government allows some seniors to defer the payment of their property taxes until the house is sold or the owner passes away.

In a recent brief, the center explored the property tax deferral program in Massachusetts, suggesting that a revamped version could serve as a nationwide model of a state-sanctioned program that would allow a growing number of Baby Boomers to use their equity to support themselves in their later years.

“Home equity is the largest asset that most people have, and given the decline in retirement resources, it could really help people achieve a secure retirement,” Center for Retirement Research Director Alicia Munnell told HousingWire. “My colleagues and I are very enthusiastic about the potential for property tax deferral, especially in high property tax states such as Massachusetts.”

Right now, two dozen states permit some type of tax deferrals for seniors, and 11 of these offer deferrals directly instead of through municipalities. Eligibility for these programs depends on age, residence, and in some instances, income and property value.

In its brief, the center suggests the creation of an expanded property tax deferral program that would be available to all homeowners over 65. In this scenario, senior homeowners could retain a tax deferral on their primary residence until it reached a cap, which would be when the deferrals, accumulated interest and outstanding mortgage reach 60% of the property value.

To encourage widespread use, Munnell said participation would be activated by checking a box on your property tax bill. The state would retain a lien for the unpaid taxes and would be repaid the principal plus interest within one year’s time of the borrower passing away of selling the home.

According to the brief, if Massachusetts’ current program were expanded to the above, homeowners in the state would save about $4,000 per year.

“It’s not quite as much money as you could get from a reverse mortgage, but you do get some money,” Munnell said. “And the proposal just involves checking a box on your income tax, so it would be a lot easier. It doesn’t require counseling or anything like that.”

Munnell said people are receptive to the idea, but it hasn’t gained traction just yet.

“I think people are generally positive when you tell them about it. The question is can we get from here to there?”

Munnell said she is certain that home equity will be an increasingly important part of the retirement income puzzle, however people choose to access it.

“People will turn to home equity to supplement their retirement income,” she said. “I am really committed to this notion that the house has to be part of the answer to the retirement security challenge.”

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