Medicare's 2-year look-back rule can spike premiums by hundreds a month when retirees sell their homes

For many older Americans approaching retirement, selling the family home and downsizing is at the top of the to-do list. The move not only makes home maintenance and upkeep easier — it can also leave retirees with a nice chunk of change.

But a Medicare trap could eat away at those earnings — and should be taken into consideration when deciding when the right time to sell is.

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Americans often start retirement, and in turn the downsizing process in their mid 50s to mid 60s. According to the Transamerica Center for Retirement Studies, the average age of retirement in 2024 was 62. Of course, depending on someone's financial situation, capabilities and career, they could choose to wait until their 70s or 80s.

The decision, however, should take into consideration a Medicare premium surcharge called an income-related adjustment amount (IRMAA). At the age of 65, you begin qualifying for government health insurance for seniors. The insurance charges monthly premiums, however, people with higher incomes pay higher premiums. That means if you downsize your home and earn a lot of money from the sale, those premiums will spike due to the IRMAA surcharge.

"You see, Medicare looks back two years at your tax return to calculate IRMAA," Mike McCracken, president and founder of Wealth Guide Financial told Fortune. "If you sell in 2025 at age 64, and that capital gain shows up on your 2025 return, it can trigger higher premiums starting in 2027 when you are already on Medicare."

The two-year look-back rule means retirees sell their homes, move on and then two years later get hit with a Medicare bill — and premium bump — they weren't expecting. For retirees living on a fixed income, the higher monthly payments could put a strain on their budgets.

McCracken told Fortune that the "number one mistake" he sees is when a home is sold too close to or after a retiree turns 63.

Let's say a couple retires at the national median age of 62 and downsize their home with $350,000 in taxable gains. This income would push them into the second or third tier of IRMAA, pushing their premiums up hundreds of dollars per month.

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The easiest and most obvious way to avoid getting hit with these premiums is trying to sell before the age of 63. If that isn't possible because of your retirement plan, then another option is to just age in place and skip downsizing all together.

Of course that comes with its own challenges, depending on the home you live in and whether you think it's possible for you to manage it as you age.

If you are set on selling, then you could use a capital gains exclusion. The IRS currently allows people to exclude up to $250,000 in profits for a single person from the sale of their primary home. A married couple can exclude up to $500,000. But if your home is worth more and profits will exceed that amount, then you will still be hit with a higher Medicare premium.

The good news is that your premiums won't stay high forever. Since the income from your home sale will hit all at once, your premiums should return to normal once the two-year look-back period ends. If you can afford the higher cost and still think downsizing is the right move, then the best option for you may be just accepting the unavoidable.

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This article originally appeared on Moneywise.com under the title: Medicare's 2-year look-back rule can spike premiums by hundreds a month when retirees sell their homes

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