Strategies for buying retirement home
Q: We, have been thinking about buying our dream/ retirement home. Can you suggest any strategies for achieving this?
Bill T.
A: With the real estate market- especially in areas where many people buy second homes, such as near the shore or near the mountains- now maybe a good time to shop for a home that you would retire to eventually. Even though prices have dropped, it may not be easy to finance the retirement home you want. The most straight forward and tax-efficient strategy is topurchase a new home with the proceeds from the sale of your current home.
If your current home has been used solely as your primary residence you’ll be able to shield from tax $250,000 in capital gains on the sale ($500,000 if you’re married). If it was previously used as a vacation home or rental property, the exclusion will not apply to the portion of time after Jan. 1, that it was used as a vacation or rental property.
Even though it might be a good time to buy, you might not be quite ready to move out of your home. If that’s the case, consider these financing alternatives:
n Liquidate your life insurance. Are your children grown and living independently? Have you accumulated a big enough retirement fund to support your spouse after you have died?
If so you may no longer need your life insurance policy. The cash from selling or surrendering the policy can be used to help pay for your retirement home. All the money that you would otherwise use for insurance premiums can go towards upkeep, taxes and other costs associated with owning the new home.
n Strategy: ask your insurance company about your cash- surrender value. That would let you how much you can pocket if you terminated the policy.
Then look into whether you would fetch a high price selling to an outside investor. Ask your agent to obtain multiply bids. The older you are , the more the policy will be worth, especially if you have some health problems. An investor will keep the policy in force and collect on it upon your death.
One reason not to get rid of life insurance is to provide liquidity in case of an estate tax obligation. However, couples with estates of up to $7 million in 2009 may not be subject to much federal estate tax at all.
Consult with your tax professional to find out whether surrendering your policy or selling it will put you ahead on an after tax basis
n Borrow: Either refinance the mortgage on your existing home or take out a home-equity loan, assuming you have enough equity to finance your second purchase and enough income to make the loan payments.
If you wish, you can eventually sell your primary residence, use the capital gains exclusion, repay the mortgage and move into your retirement home.
CAUTION: This strategy can greatly increase your debt, and interest on a mortgage you refinance above your old mortgage might not be deductible. Talk to a tax professional.
n Rent: Sell your principal residence on the stipulation that you can rent it from the new owner for a certain period of time-say, two years. At the same time, the sale proceeds can go towards the purchase of your retirement home.
n Loophole: You can enter into a sale-leaseback with a family member, such a grown son or daughter. As long as the entire transaction is at fair-market value (based on comparable prices in the area), you’ll get the capital gains exclusion, while the buyer will get the tax benefits of owning rental property, such as depreciation and a property tax deduction. I’m in real estate-not taxes. If this strikes close to home-please talk (as I have said through-out this article) to a tax attorney/consultant for updated advice.
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
239-549-5724 Office 239-542-7760 Fax