Long ago and far away, homeowners getting ready to retire would sell their family home to younger families looking to move up and purchase a smaller less expensive property. There was also this crazy notion of sales contracts containing a contingency on the buyer selling their home. Well, in case you haven’t noticed, those days are long gone.
The real estate market is so hot that homeowners frequently don’t want to sell because buying another property, even if it’s a smaller one, is too challenging. Retirees don’t want to risk the stress of finding something they’re comfortable living in and certainly don’t want the hassle of competing in the current market. Therefore, they’re not moving, which is feeding into the low inventory rates all over the country, freezing up the market.
Retirees also have plenty of good financing options without selling, should they need to tap into their equity. Refinancing both mortgage amounts and terms at today’s low rates will give them money in their pockets to offset the expenses of continuing to live in their homes. And, of course, reverse mortgages continue to be a viable option for some seniors. In addition, switching from a 30-year amortization to a 15-year amortization would help to accumulate more equity down the road when seniors may be more comfortable selling.
There are plenty of financial opinions on whether retirees should carry a mortgage or not and everyone’s financial position is different and should be analyzed by a professional. With interest rates historically low and the stock market continuing to grow, many financial advisors will be pro-mortgage and advise to invest in the stock market, instead. For retirees with an income that is sufficient to cover the monthly carrying charges of financing, this could be the obvious decision.
There are many benefits to owning a home, whether you decide to continue carrying a mortgage in retirement or pay it off. With the new tax regulations, writing off the interest on a home mortgage is not as advantageous as in previous years, but again, everyone’s situation is different.
What isn’t changing for most homeowners is the capital gains exemption when you sell your home. The way the capital gains law stands now is single tax filers get an exemption of $250,000 of net gain on the sale of a primary home. Married couples filing jointly get an exemption of $500,000 of net gain on the sale of a primary home. This exemption can be used more than once by sellers who meet the requirements as often as every two years.
With the sale prices of homes accelerating daily, there will be plenty of homeowners who will exceed their exemption limits. However, homeowners can increase their cost basis and lower their gain if they make improvements to their homes over the years. This does not mean repairs – it means improvements on landscaping, renovations and extensions to the property. If you’re not sure what qualifies and you need these extra funds to add to your cost basis, you can find exactly what the definition of “improvement” is on the IRS website.
There will probably be a change to the capital gains laws, including primary home capital gains exemptions, coming soon. However, many sellers with gains within the $250,000 to $500,000 limits won’t be affected. Capital gains above those limits will depend on income level and other factors in the proposed tax bill.
Maybe my memory of things past is fuzzy, but wasn’t buying and selling homes more civilized years ago? It was certainly less stressful, but here we are with tons of equity and the worries that go along with it.
