Thinking of Selling Your House? Read this First!

Expert Column

Suzanne Wolfson, MBA, CFP

Financial Planner for Retirement
Suzanne Wolfson, CFP® is the founder of For Retired Only™, a fee-based financial planning...read more

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Financial Planning for Retirement

Thinking of Selling Your House? Read this First!

Comments (4)

Should I Sell My House?

This is frequently the most significant financial decision faced by many seniors—or by family caregivers. Often the impetus is that a person’s cost of care has risen or that home maintenance and safety issues have become unmanageable. The situation can become acute if family members or other potential caregivers live too far away from the homeowner to provide help on a regular basis. Beyond the potential emotional issues that surface and need to be considered, there is both a financial impact and possible benefits that can result from selling a home.

Often while decisions about selling the home are occurring other related and important choices are being made simultaneously in regards to an elder’s care needs. Hopefully all these decisions incorporate both present and future possibilities. Unfortunately I often see people make decisions that only resolve the present issues. And later caregivers and family members face ramifications or even losses that they did not calculate initially. You will need objective financial assistance. Remember your realtor is not a financial planner. It is common today that someone’s home has become a person’s major asset and financial resource. That being the case, the decision whether to sell a home should be thoroughly assessed.

There are two financial issues one must consider that are related to the costs of sale. One is transactional fees and the other is tax implications. Transactional fees vary, but can include commissions, escrow fees, inspection fees and transfer taxes. Taxes can include capital gains, estate tax benefits, which can be lost or gained, and income tax. How the proceeds from the sale are invested may change the existing tax scenario and the availability of funds for future expenses. If you are selling a home because it can no longer accommodate your needs, such as having to walk up flights of stairs, consider moving to a smaller place with easier access. Sometimes the low property tax rate can be transferred; however, this is regulated on a county by county basis. This can be a tremendous annual expense saver.

Capital Gains

Federal capital gains taxes are 15%, but each state has different tax rates. (California’s has a maximum of 11%.) It is imperative that the capital gains is calculated before making a decision. Calculating the tax implications can seem very complex, but is the only way to determine what the sale’s net proceeds will be. Below is an example that incorporates a total capital gains cost of 23%. There are many individual factors that must be considered in the application of this example and I recommend you consult your tax advisor for an accurate estimate.

To Calculate the Cost Basis:

Property purchased in 1965	$50,000
Remodel in 1975	$40,000
Other capital (non-maintenance) improvements	$10,000
Total Cost Basis	$100,000

To Calculate the Total Tax Basis:

Sales price for property in 2007	$1,000,000
Tax exemption per spouse	($250,000)
Cost Basis	($100,000)
Estimated transactional fees	($70,000)
Total Tax Basis	$580,000

To Estimate the Capital Gains Tax:

Total Tax Basis	$580,000
	*23% (estimated)
Estimate Capital Gains (for cash sale)	$133,400
Net Proceeds	$796,600

Estate Taxes

If the property is owned at the time of death the cost basis rises to the actual property value on the date of death. This means there will be no capital gains tax. In the event a spouse passes away the living spouse may be given a 50% increase to the cost basis; however this depends on factors such as the will, trust or how title was held at the date of their death. There are also other estate planning issues that might also be considered at this decision making and assessment time.

Income Tax

The income tax rate may change based on how the net proceeds are used. Many sell their homes in anticipation of needing the extra funds for medical expenses. When weighing your options for how to invest the proceeds you must consider taxation as well as what your future needs may be and your projected cash flow.

Making the Decision

Remember, there is no going back on this decision! Before selling your house look at all the possibilities and measure the pros and cons of each with the idea of what the future is likely to bring. Your circumstances can change and so it is best to project what your future financial needs will be and make decisions based on all considerable factors. This is difficult to do. In fact, just the other day I got a call from a colleague who is also an experienced fee-based financial planner. He and his mother were trying to decide whether or not to sell her home. As we talked I realized he hadn’t considered the entire spectrum of future health scenarios. When planning for the future, make sure you are realistic as to what every long-term care option costs. I reminded my colleague to look at his mother’s needs—and to forecast probable future scenarios. His likely solution changed as he become aware of all his possible options and considerations. This phone conversation was a reminder of how expertise can make a significant difference in perception. I urge everyone to consult a financial planner before making the decision to sell a home.

Posted in Advanced Planning, Financial Planning for Retirement: Suzanne Wolfson, What About My House?

Comments (4)

COMMENTS
4 Responses to “Thinking of Selling Your House? Read this First!”

Lisa Dunn Says:

Hi Suzanne,
Nicely done! It takes a team to help elders move successfully, and if there are health considerations it’s even more important that the right people are involved. With the right advice, seniors can save an untold amount of money and a *lot* of unneccesary stress! I’ve dedicated my blog to this topic; hope you’ll visit it.
Should a senior sell the house? Says:

[…] The always informative Gilbert Guide Blog tells us of things to consider when trying to decide if a senior should sell the house. […]
Luba Muzichenko Says:

Once a senior does decide to sell their house, they need to be sure to pick a Realtor they can trust to handle the transaction. I recently heard a horrible story about a senior trying to sell her home in a slow market. The house was sat on the market … and the Realtor approached the client and offered to buy the property for $140,000, but with only $10,000 and $625 a month until the $140,000 is paid off. And he coincidently owned an apartment that he would rent to her for $625 a month. AND he wanted his commission which was to be deducted out of the $10,000 that he was “giving” her as a downpayment.

Not all real estate agents are predatory, but they are out there. The best way to find one that isn’t is through a referral from a friend or family member. Picking the right agent, especially in a slow market will be the key to a sale where the seller’s interests are truly represented.
Jerry Bartholomew Says:

Another consideration for seniors is that the sale of a home converts an exempt asset (the house) into a non-exempt asset (cash) for purposes of long-term care Medicaid. The sale of a house should be considered carefully from an estate planning point of view.