You like the area where you live -- jobs, schools, recreation -- it’s got what you need and want. So, is it a good time to sell your home and relocate down the street?
At first blush, that might sound like a ridiculous suggestion. Who wants to give up 6% of their home equity wealth to a real-estate broker for selling their home without good reason? Who wants the hassle of packing up everything, moving and redecorating? While this might be your idea of a nightmare, almost 70% of homeowners who sell their home actually move within the same county. Considering that about 5% of American homeowners move homes every year , (while more than 20% of renters move annually), we can estimate that 3 million American homeowners are moving within the same county each year.
What’s behind this mass short-distance migration? The reasons are both personal and financial, although financial seems to be the primary driver (and they could apply to you). If you’re considering a move but are unsure about leaving your area, take a look at our seven reasons to move locally.
#1: Take Advantage of Home Sale Tax Exclusion
Are you interested in a $119,000 tax break? Have we got your attention… here’s how it works: The US gives taxpayers a slew of incentives to get on the property ladder and one of the most important is the Home Sale Tax Exclusion. For couples benefiting from $500,000 or more in capital gains, this tax exclusion can be worth up to $119,000 (assuming 20% capital gains tax rate and 3.8% Obamacare surtax for high earners). When you sell your home, any profit you make can be treated as tax-free income as long as you meet certain qualifications:
- You must have owned the home for at least two years, and
- Used it as your primary residence for two out of the last five years.
If you’re single, you can exclude up to $250,000 of capital gains from your taxes, and if you’re married and file jointly, you can exclude up to $500,000 of capital gains. It’s a great perk to take advantage of so you can cash out on all the home equity you’ve earned on your current home. For homeowners in areas that have experienced appreciation, this should be one of the main influences informing whether to relocate or not.
#2: The Mortgage Interest Deduction
If you’re a homeowner, you’re probably intimately familiar with the mortgage interest deduction whereby homeowners get a tax break on the interest they pay on their mortgage. On a regular 30-year fixed mortgage, this deduction is most impactful at the start of your mortgage -- assuming a 4% rate on a $500k mortgage, here’s how the mortgage interest deduction breaks down over time:
|Year||% of annual mortgage payment that is mortgage interest||Annual savings to homeowner with a $500k mortgage, 4% rate, and 26.5% tax rate|
As you can see, homeowners save thousands of tax dollars when they are at the start of their mortgage cycle. While you could just refi to reset the life of the mortgage and benefit from the tax write off, it’s the act of moving that is often the trigger for homeowners to restart their mortgage anew and to benefit from the mortgage interest deduction. Just factoring in the mortgage interest deduction savings (and all other things being equal), homeowners could relocate approximately every 8 years to offset the costs of broker fees and still come out on top financially….
"This should be big enough for the two of us."
#3: You Can Afford More Home
The biggest single reason for moving identified by homeowners who move locally is the opportunity to move into a new or better home. Whether it’s a growing family bursting at the seams (too many bunkbed fights!) or your increasing expectations for comfort (sharing a sink with your loved one isn’t cutting it anymore) or your desire to watch movies on an ever bigger screen/projector (the load bearing capacity of your current home’s walls can’t support your dream giant HDTV), people outgrow their homes. It’s not uncommon that this desire to move coincides with having enough equity in your home to make a downpayment on bigger digs. It’s the basics of homeowner leverage -- the equity gains in your current home enable a bigger downpayment on your aspirational next home -- you can buy more home.
It’s important to note that this calculation ties in with #1 (a lot) and #2 (a little). At Point, we often see homeowners tap into their home equity of their existing home to get the downpayment together for the next home or to invest in an addition to their current home to get the space they need.
Get your calculator out!
#4: Lower Your Cost of Living
In recent years, especially after the Great Recession, many folks moved homes so as to lower their cost of living. It is the motivation for 11% of moves within the same county and it can be a very smart financial decision. If your home is underwater and your bank is willing to accept some “losses”, a short sale may be a very compelling option to look into. Similarly, if the kids have left the home or you’ve gone through a divorce or a loved one has passed (all often emotionally taxing events), it might be a good time to consider downsizing -- less space to maintain (and pay the mortgage on) often means significantly lower monthly housing obligations.
One of the BIG benefits of downsizing is that it frees up cash --- if you’re lucky enough to have a lot of equity in your home then downsizing often means that you have a lump sum of cash left over after moving into your new home. Even if you haven’t benefited from appreciating property prices, moving to a more affordable home usually means you have a smaller mortgage and, therefore, a lower monthly mortgage payment.
If you want to stay in your home but need to lower your cost of living, Point might be a good alternative to a sale. With Point, you can sell a fraction of your home today without bringing on more monthly debt. And you don't need to relocate.
#5: Closer to Work
While just 3% of in-county movers report doing so because of their commute, it still ranks as one of the major reasons. If you’ve ever spent an hour on a packed San Francisco MUNI, Boston’s T, or a Dallas morning commute traffic jam, you probably value an easy commute. While some major cities have seen a rise in movers from the suburbs, the move is usually still in the other direction and, often, the jobs have moved with them. Spending 2-3 hours traveling means less time with your loved ones, relaxing or enjoying your hobbies -- in short, commuting is a massive time suck and homeowners are willing to relocate to minimize its impact on their free time.
Does this look like your kid?
#6: Relocate for Better Schools
For many kids, hearing the words, “We’re relocating” basically signifies the end of the world as they know it. However, they are often the main reason behind the move -- or rather, their education is. US education is largely subsidized by property taxes which means, the areas collecting the most property taxes tend to have the best subsidized schools and benefit from a larger budget. Those schools have better test results, their students go to “better” universities, they get “better” jobs…. So parents want their kids in those schools, so they relocat to get into those school districts, often paying a hefty premium to find a home there. That competition to get into the most desirable school districts increases home prices there which means even more property taxes collected…. And that cycle reinforces itself because the school district’s coffers grow with the additional property taxes.
This motivation to move is wholly understandable but often sees families relocate to small properties (or even become renters) so that they can afford the cost of housing in those school districts. We will publish more research on this phenomenon.
#7: Marriage; Coupledom; Starting a Family
The single biggest reason (accounting for 17% of all moves) is marriage or to establish one’s own household. As sure as night follows day (or is it the other way around), homeownership follows marriage for the average American. Interestingly, as marriage rates have dropped over the past few decades, so have homeownership rates so we might expect this factor to fall in importance if current marriage trends continue.
An Alternative: Sell a Fraction of Your Home with Point
For homeowners who want to reduce their monthly debt obligations, expand their current home with a renovation and an addition, selling their home outright is not the only option. Point lets homeowners sell a fraction of their home at today's market value, freeing up cash for renovations while being able to live in the property without additional monthly payments. This is an important alternative for homeowners who want to stay where they are but need to free up some cash.
Back in the 50’s, 20% of Americans would relocate in a given year -- and they may have been on to a good thing. Even more so now, there are a lot of reasons (personal and financial) for folks to consider a move. The table below summarizes the 2013 ASEC Census findings findings around why homeowners and renters relocate.
|Change in marital status or to establish a household||Other family reason||New job or job transfer||Misc work -- looking for or retiring||To be closer to work/easier commute||Wanted own home, not rent|
|Moved to own home||17.11%||15.82%||8.58%||5.10%||3.03%||15.65%|
|Moves to rental||16.71%||13.62%||11.41%||5.04%||5.69%||1.07%|