Home sales can raise Medicare premiums for retirees years later

Retirees who sell a long-held home can face higher Medicare costs well after the closing, financial planners told Fortune. The issue is the income-related monthly adjustment amount, or IRMAA, a surcharge that can raise Medicare premiums when a home sale produces a large taxable gain.

Fortune reported that many Americans consider downsizing around retirement, often from their mid-50s through mid-60s, with some waiting until later. For homeowners whose property has appreciated over decades, the sale can strengthen retirement finances but also lift reported income for Medicare purposes.

Mike McCracken, president and founder of Wealth Guide Financial, told Fortune that the mistake he most often sees is selling too close to age 63 or after that age without first checking the tax and Medicare effects. Medicare uses a two-year tax return lookback to set IRMAA, he said.

That timing can surprise people who sell before they begin paying Medicare premiums. McCracken told Fortune that a person who sells in 2025 at age 64 and reports the capital gain on that year’s tax return could see higher Medicare premiums in 2027.

McCracken gave Fortune an example involving a married couple with $300,000 in taxable gain from a home sale. He said that level of gain could push the couple into the second or third IRMAA tier, raising monthly Medicare premiums from about $406 to more than $800 by 2027.

Home appreciation is expanding the risk

Elizabeth Gavino, principal at Lewin & Gavino, told Fortune that more clients are being caught off guard by the surcharge. She said the problem has grown as home values have risen sharply over long ownership periods.

Gavino pointed to coastal California buyers from the early 1990s as one example. She told Fortune that some couples there may have $800,000 to $1.5 million in home appreciation, potentially leaving them with as much as $1 million in taxable gains included in modified adjusted gross income.

The two-year delay makes the cost harder to anticipate, Gavino told Fortune. Homeowners may sell, relocate and then receive a larger Medicare bill two years later, after the higher-income tax year enters the Medicare calculation.

McCracken also told Fortune that the issue is likely to keep spreading because median home prices have more than tripled in many areas. He said even gains remaining after the home-sale exclusion can be enough to trigger IRMAA.

Jenna Stauffer, a global real estate adviser and broker associate at Sotheby’s International Realty, told Fortune that the problem can be acute in markets such as Florida, where prices climbed during the pandemic. She said advance planning has become more important for retirees considering a sale.

Planning options are limited

Fortune reported that one way to reduce the risk is to sell before age 63, if a sale already fits the household’s plans. After that point, the two-year Medicare lookback can bring the sale year into the premium calculation.

Some homeowners may decide to stay put after reviewing the numbers, Stauffer told Fortune. She said retirees often hold much of their wealth in their home, so a sale can affect more than the real estate transaction itself.

The IRS exclusion for a primary home can reduce the taxable gain, Fortune reported. The exclusion is up to $250,000 for a single filer and up to $500,000 for a married couple, but financial planners told Fortune that the remaining taxable amount can still be high enough to affect Medicare premiums.

Gavino told Fortune that the $500,000 exclusion has not changed since 1997, while home values in major markets have risen 300% to 500% since then. If retirees cannot avoid a sale, Fortune reported, the higher premiums may be treated as a temporary cost that eases once the high-income year falls outside Medicare’s lookback period.

This story draws on original reporting from Fortune.