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How States Could Use Home Equity to Help Seniors Defer Property Taxes

A property tax deferral program that lets homeowners use some of their home equity to supplement their retirement income could present a novel twist on equity extraction, according to a new brief from the Center for Retirement Research (CRR) at Boston College.

Though such a deferral does not offer as much access to home equity as a reverse mortgage, the process would be easy, with no upfront costs. Additionally, after repayment of loan and interest, some of the value of the house could be passed down to heirs or used for other purposes.

Center Director Alicia Munnell, Research Fellow Anek Belbase, Senior Research Advisor Wenliang Hou, and Research Associate Abigail Walters detailed the retirement challenges faced by Americans — which they note are compounded by a higher cost of living in Massachusetts. They also described the major existing programs for relief, and detailed a proposal for a new statewide property tax deferral program that would be open to all homeowners in the state.

Massachusetts currently has a senior property tax exemption program that cuts $500 from the property tax bill of people above age 70 who meet certain residency, ownership, income and asset requirements. Local governments later recoup the deferred taxes with interest when the homeowner dies or sells the house — essentially allowing the owner to fund some of their tax payments with home equity.

The Boston College researchers said a new statewide property tax deferral program could address many of the shortcomings of the existing deferral program, which include most homeowners being ineligible, eligible homeowners being unaware of the program, and the fact that homeowners who are both eligible and aware do not know how to apply.

The program outlined by CRR would allow individuals aged 65 and older with a primary residence in Massachusetts to defer their property taxes until the taxes, accumulated interest, and any outstanding mortgage balance reached 60% of the assessed property value.

The program would also:

  • be triggered by checking a box on the city or town property tax bill
  • have Massachusetts send the city or town an amount equal to the deferred taxes when the tax bill is forwarded to the state
  • set the interest rate at the state’s borrowing cost plus a buffer for administrative costs and defaults
  • have the state retain a lien on the house for unpaid property taxes and be repaid the principal plus interest within a year of the homeowner dying or selling the home

“[A]n average older homeowner in Massachusetts would save about $4,000 a year by deferring property taxes,” the researchers wrote. “This amount substantially exceeds the funds provided through the state’s existing tax deferral, exemption and credit programs, which could be phased out very gradually for homeowners.”

The proposed program would decrease complexity by phasing out the current system, and would allow seniors to age in their own homes, the researchers noted. It would also ease the burden on local budgets through the contributions from the state to offset the deferral amount.

“Most people are reluctant to downsize, and even when they do, they rarely reduce their household expenses,” the researchers concluded. “Reverse mortgages are an option, but most households are put off by the enormity of the decision, the complexity of the product, and the high upfront costs.”

Read the full brief from the Center for Retirement Research.

Written by Maggie Flynn