16 Feb With new pension, possible real estate sale, will Medicare cost more?

Q. In 1997, I purchased and resided in a condo in Bergen County. In mid-2015, I relocated to Florida for my employment, and began renting out the condo. I’ve always had the same tenant. I recently retired and realize I do not want to move back to New Jersey. I’m wondering if it makes the most sense to sell the condo either in 2024 or 2025, or continue renting indefinitely. I make about $850 a month profit. To get a better picture of my tax issues, I received a lump sum severance so my income will be about $160,000. My small pension is about $350 a month and Social Security of about $3,390 a month. A sale would enable me to put more towards the purchase of a home for me to live in (currently I rent) and I also realize that since I have to recapture depreciation, every year rental would add that cost. I won’t have the $250,000 capital gains deduction as it’s a rental over eight years, and my profit would not exceed $150,000. And then there’s IRMAA. Thoughts?
— Considering a lot

A. There’s a lot to consider before you can make an informed decision.

Let’s tick them down.

At the forefront of these decisions is the impact on your cash flow that the loss of $850 a month may present, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

She said with your recent retirement, it is essential that you review your expenses to understand how the different sources of income you will be receiving are going to enable you to meet those needs.

This would include any income that might be drawn from resources other than your pension and Social Security. The additional $10,200 per year of rental income may be income that you need to continue to receive, she said.

Mott said another analysis that should be prepared prior to making a decision to sell the condo is working through the numbers to get an understanding of how your cash flow is going to change if you are no longer renting, but own a home.

A comparison of the all-in cost of renting versus the costs related to homeownership, less the $850 in rental income, may help you decide what is the best way to proceed.

Mott said you should consider these questions:
· Would the net condo proceeds enable you to own the home outright or would you need to take out a mortgage?
· What would the monthly cost of the mortgage, taxes, insurance and possibly association dues look like in comparison to your rent?
· How much more might you be paying for utilities for a potentially larger property?
· What would need to be set aside for the maintenance and repairs that are an inevitable part of home ownership?

Now let’s tackle IRMAA, which is short for Income-Related Monthly Adjusted Amount.

This is a surcharge that is applied to both Medicare Part B and Part D insurance premiums when modified adjusted gross income (MAGI) exceeds certain thresholds, Mott said, noting that for Medicare purposes, modified adjusted gross income is defined as total adjusted gross income plus tax-exempt interest income.

“For an individual, MAGI over $103,000 will be considered for the IRMAA surcharge in 2024 and for a couple it’s $206,000,” she said, noting the figures are adjusted each year.

There are a number of breakpoints that determine how much the surcharge will be using the MAGI, she said. IRMAA is adjusted annually when new tax return information is provided by the IRS to Medicare and the Social Security Administration will mail a notice regarding the assessment of a surcharge, she said.

When it comes to understanding your cash flow and expenses, you will need to take IRMAA into consideration as a result of the severance package that you received from your employer, but not this year, she said.

“Because IRMAA is based on a 2-year look back on tax returns it is not something that will impact your Medicare premiums immediately, but in 2026 when the 2024 tax return is used as a basis for the calculation,” she said. “Should you decide to sell your condo, you may want to consider holding off for another year so as not to create an even bigger taxable event than what has already been incurred and which would further increase the IRMAA surcharge that you would be assessed.”

Waiting until 2025 on a possible condo sale would impact 2027 IRMAA calculations, she said.

To fully understand the tax implications of the possible sale of your condo, Mott recommends you meet with a tax professional to determine exactly how the depreciation recapture will impact what you might owe. Knowing what the tax obligation might be can help you plan for how it will be paid such as with proceeds from the sale that are set aside or from another account that you might have, she said.

“Some of the recapture will likely be taxed as income — up to 25% — but some may qualify for capital gains tax rates, which are lower,” Mott said. “You’ll also want to discuss with your tax advisor how the use of stock sales to generate losses might offset the condo sale’s potential capital gains.”

When you have a better grasp on what the possible tax picture may look like, you’ll be better able to decide what assets might need to be liquidated to generate losses, she said.

“While there are many factors to be considered in whether to keep or sell your condo, understanding how it will impact your cash flow from both an income and expense perspective should be first and foremost,” Mott said.

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This story was originally published in February 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.