Hidden wealth
How to tap the hidden wealth in THIS market. Take into consideration I wrote this column awhile in the past when I visited in California. Things weren’t as bad as they are now, BUT almost, so it still applies. there seems like a silver lining — I hope.
Q: Bob, how do I (like many people here in Lee county as well as all over). Get some money out of my home?
With the tremendous deals in housing values, homes are/will still be the biggest source of wealth for many house holds, so it is important to make the most of real estate assets.
In (this) hot/moderate markets, homeowners may be tempted to cash in by selling, but that can generate capital gains taxes and after you sell the home, you still have to spend money on a new place to live.
I’m not the hottest (I did retire from California with a lot of believers) financial planner there is, but here are some cases and the advice I gave. Hope it applies.
Down sizing
A 77-year-old grandmother owned a house worth $600,000 up from $40,000 she had paid for it four decades earlier. Raising costs and property maintenance costs have become a major burden, and she no longer needed such a big place, so she was considering selling. Because of the appraisal and appreciation, any sale would produce a huge tax bill. A single person can exclude the first $250,000 in profits from the sale of a primary residence. After that, the homeowner may pay federal capital gains tax up to 15 percent, as well as state taxes (in other states).
The woman sold the house and realized a $550,000 capital gain. Her cost basis in the home were $50,000-$30,000 purchase price. Plus $20,000 in capital improvements. Only $300,000 ($550,000 minus the $250,000 exclusion) was subject gains at a rate of about 20 percent federal and state (if you have state?).
She paid the $60,000 in taxes, then used the remaining assets to invest in a conservative portfolio (in this market it can be more for less) and her grandchildren’s college savings. She put $55,000- the maximum allowable initial deposit without incurring federal gift taxes- into a 529 college savings plan for each child. The amount contributed to the plans as well as the accumulated investments could be withdrawn from the account tax free as long as the withdrawal is used for qualified education expenses.
If the children decided not to attend college- or the grandmother changed her mind- she could withdraw the money and pay a 10 percent tax penalty as well as tax on income and capital gains. Alternatively, the grandmother could change the account beneficiary to another qualified to a family member to keep the account going and avoid (or delay) taxing taxable withdrawals.
To avoid buying a new house or paying rent, the grandmother chose to move in with her son and his family. Now she helps pay the family’s housing costs. Freed from much of the burden of paying for much of his children’s college, her son now can afford to increase his savings. Now he is thinking about taking an early retirement.
Sudden lay-off
A 52-year-old bank executive lived in a condominium with his wife and two children. With $500,000 in his 401(k), a deferred compensation plan and a good-paying job the man saw no need to set aside cash for emergencies. Then his employer informed him he would be laid off and he would receive checks for only two months more, unless the executive found a job quickly. He would need to raise cash quickly for living expenses. He considered selling the condo and moving to a cheaper place/area, but that would have forced him to put his children in a new school. He could have raised money with a second mortgage, but that would have meant taking on long-term investment payments and paying closing costs. He also could have taken cash from his retirement or deferred-compensation plan.
Always consult your account/attorney. Next week I have a solution and a few more cases.
Have a real estate question? Write, call, fax or e-mail:
Bob Jeffries, Realtor
Century 21 Birchwood Realty, Inc.
4040 Del Prado Blvd., Cape Coral, FL 33904
239-540-6659 Office • 239-542-7760 Fax
bobjeffries4@juno.com • c21birchwood.com