What happens to my Medicare benefits if I sell my house?
If you receive Medicare benefits, it's important to know how selling your house may affect your taxable income — and therefore, your monthly Medicare premiums. While most everyone of a certain age is entitled to federal healthcare benefits through Medicare, high-income earners pay higher premiums for their coverage.
In 2023, individuals with a modified adjusted gross income over $97,000 per year or married couples filing jointly with a modified adjusted gross income over $194,000 paid a surcharge called the income-related monthly adjusted amount (IRMAA) for Medicare Part B and Part D.
The IRMAA goes up based on your income bracket. Your IRMAA is based on your income tax return from two years ago. So, 2023 premiums are based on your reported income from the tax year 2021 that you filed in 2022. The IRS forwards this information to the Social Security Administration, which then notifies you about whether you owe IRMAA.
When you sell your primary residence, some of the profit is exempt from capital gains tax. If you are selling as an individual, the first $250,000 is tax exempt. Married couples filing jointly who sell their house may exclude up to $500,000 for capital gains on real estate.
As with all rules, there are exceptions and I am not a tax accountant, so I am not qualified to get into the details. I write this so you can go ask your accountant to review your particular situation and provide guidance.
Be aware that you can file an appeal with the Social Security Administration to reduce your IRMAA if you have a qualifying event like the death of a spouse, a change in marital status, a significant loss of income, or the like.
If you sell your house and move, you may need to change your Medicare plan. Part A offsets the cost of inpatient care received in a hospital or skilled nursing facility. Part B covers outpatient services like doctor visits, lab work, mental health care, and more. Parts A and B follow you no matter where you are in the United States.
Part C (Medicare Advantage) is often provided by a regional group, so you'll need to find a new Advantage program if you move out of their service area. Part D covers the cost of prescriptions, which is sometimes tied to a pharmacy network. If that network is regional, once again, you'll need a new plan.
Be aware that the income from the sale of your house may impact more than just your Medicare benefits. If you receive assistance because of a disability, your government subsidies can be adjusted based on your income and/ or your assets. The sale of your house generates income (usually).
If you are younger than 62, the income from the sale of your house may also impact your Social Security benefits. Again, for details talk to your accountant.
I must say, the fact that Social Security withholdings are not tax deferred when they are taken out of our paychecks but when we receive benefits, we are taxed on some of that income seems grossly unfair. Also, when you penalize older, experienced workers by taxing their Social Security income, you decrease their motivation to be economically productive. At a time when we have a labor shortage, this is especially counterproductive.
The long and short of it is this: selling your primary residence generates taxable income and taxable income affects both Social Security and Medicare benefits. Luckily, there is the capital gains exemption. However, if you own a rental property, the capital gains exemption doesn't exist, so be especially mindful of selling a rental when it comes to taxable income.
It is especially true if you've owned a rental for many years and have refinanced it. For example, I have a rental I bought 50 years ago. I have depreciated it down to $2,000. It is currently worth $350,000. The current loan on it is $275,000. If I were to sell this property, I would not benefit from the capital gains exemption, which means my profit would be $350,000 minus $2,000. I would pay taxes on $348,000.
This amount is added to my income when calculating government benefits such as Social Security and/or Medicare, as well as others.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462- 4000. If you have an idea for a future column, share it with me and if I use it, I'll send you a $25 gift certificate to Schat's Bakery.