LEGAL READ: Home Real Estate Planning Alternatives

Home values in this area have rebounded nicely since the downturn about 5 years ago. So, the future appears brighter for older property owners whose homes are their largest asset.

Nevertheless, most homeowners do not save or invest as much as they hope before retirement. Social security is rarely enough to sustain their accustomed manner of living. Consequently, many look to their home equity as their key means of financial support in their later years. But, just how should they use their home as an income or cash source?

Selling the home seems like a logical answer; however, that may or may not be the optimal decision. Tax and non-tax factors should be identified, and all reasonable alternatives explored.

First, owners must evaluate their desire to continue to live in their home and their ability to do so safely. Given increasing longevity and skyrocketing health and long-term care costs, more uncertainty exists about how long many owners will be able to keep paying property-related expenses and all other costs of living without running out of funds.

One way for an owner to potentially “have his cake and eat it too” is to obtain a reverse mortgage. Qualifying homeowners who are 62 or older with sufficient home equity can, immediately upon obtaining a reverse mortgage, have no mortgage payment (principal or interest) to make as long as they stay in the home – with all accrued principal and interest due only after they move out or die. Eligible homeowners are further able to borrow additional sums from the reverse mortgage lender in the form of a lump sum and/or credit line for home improvements, living expenses (or whatever they wish).

Unfortunately, many good candidates refuse to consider a reverse mortgage because of various misconceptions. They’re not right for everyone, but they are well regulated and beneficial under the right circumstances, providing the means by which an older owner can tap into home equity, stay in the home and live later years more comfortably.

Homeowners who are not set on staying in their homes might sell and either buy a more modest residence or rent one. But, a few factors may make that choice less desirable, including potential income tax liability triggered by a sale. Applicable tax laws are way too complex to cover in detail (talk to your accountant!), but eligible homeowners are entitled to exclude a certain amount of capital gain on the home sale (e.g. $500,000 for married couples and $250,000 for an unmarried individual); however, all gain may not be excluded and thus some tax liability may still result.

A related tax matter is that if a homeowner keeps the home for life, the person(s) inheriting (e.g. surviving spouse or children) receive a “step-up” in income tax basis on the homeowner’s death. This allows the inheritor(s) to escape any capital gains tax that would have been due on a sale prior to the homeowner’s death.

Aside from understanding the tax implications, a homeowner should consult with a financial advisor who can run realistic projections about: how much income and growth is realistic to expect from reinvestment of the net (after-tax) proceeds from a home sale; whether such returns are likely to accomplish the homeowner’s financial goals; and whether any alternatives to selling make more sense.

Another option may be to refinance. With today’s low rates and a tremendous variety of loan programs available, restructuring property-related debt can sometimes make a big impact. Experienced mortgage brokers can provide valuable advice and assistance.

Rents are currently robust, so leasing one’s home may be the right decision. Doing so may generate more net income, after available tax deductions, than selling it and reinvesting the proceeds. And again, if the home is leased (kept) until the owner dies, the tax basis step-up creates potential future tax savings. Of course, converting a personal residence to a rental requires finding a suitable substitute residence, and there are ongoing risks of owning and managing a rental property to consider (maintenance costs, tenant problems, vacancies, etc.).

Similar scrutiny should be applied to investment real estate; albeit different alternatives are available. Evaluating, structuring and implementing real estate financing and disposition alternatives can be complicated. Hence, they should only take place after you receive advice from appropriate professional advisors, including your estate planning attorney, who can help ensure proper integration with your estate plan (particularly your revocable living trust).

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

ESTATE LEGAL SERVICES: Need to find an estate planning attorney in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on Revocable Living Trust, Wills, Durable Power of Attorney, Advance Health Care Directive, Special Needs Trusts, and Irrevocable Trusts & Advanced Estate Planning, including Irrevocable Life Insurance Trust (ILIT), Qualified Personal Residence Trust (QPRT), Defective Grantor Trust (IDGT), Grantor Retained Annuity Trust (GRAT), “Crummey Trust”, and various types of Charitable Trusts.