Downsize with a reverse mortgage, move your tax base, and take a capital gains exemption? C’est possible
A future trend for Southern California boomers? For boomers and seniors living in other areas, two out of three aren’t bad either.
The house is big, the kids are gone, you are tired of maintaining the garden, and you and your spouse only use half the house. Could it be time to move while increasing your retirement savings and cash flow at the same time?
The passing of HR. 3221 and modernizing the FHA and reverse mortgages is a step in the right direction to help boomers and seniors plan for retirement. The improvement is yet to be measured, but here are some interesting ideas.
In recent weeks, the president signed HR 3221 into law. Among many things, this law will dramatically change reverse mortgages. Going to:
o Increase loan limits for reverse mortgages (limits have not yet been publicly defined by HUD), which means more liquid cash for reverse mortgage recipients.
o Limited origination fees – 2% of the first $ 200k of the maximum claim amount, plus 1% of the balance above $ 200k up to a maximum origination fee of $ 6000. On average, this will reduce origination fees by more $ 1,200 for Southern California reverse mortgage borrowers.
o Enable the use of the FHA HECM reverse mortgage for the HOME PURCHASE
o Allow the FHA HECM reverse mortgage to be used in cooperatives, among other improvements
In 1986, California voted to provide tax relief (Proposition 60) to homeowners age 55 and older by allowing (with some restrictions) to transfer their existing property tax base to replacement homes of the same or lower value within from the same county or a reciprocal participating country. county (Proposition 90). As boomers begin to retire and look to trade in smaller, older-friendly one-story homes, or consider 55+ communities, using this proposition may become more popular. You can use this benefit once. There are numerous restrictions including that a single person or spouse must be 55 years old when selling their original property. Your new property must be a primary residence with current market value equal to or less than your original residence. Proposition 60 covers transfers of property within the same county. Proposition 90 allows property tax base transfers with participating counties of Alameda, Los Angeles, Orange, Santa Clara, San Diego, San Mateo, and Ventura counties. Be sure to contact your tax assessor’s office for up-to-date information.
The Taxpayer Relief Act of 1997 changed the way real estate capital gains taxes are calculated. The IRS issued updates in 2003. This rule offers up to $ 250,000 of tax-free sales earnings for a single person and up to $ 500,000 of earnings for a couple. To qualify, the seller must have owned and occupied their primary residence a total of two out of five years prior to the sale of the home. (Consult your tax expert for up-to-date advice)
Even with today’s weak housing market, many homeowners have substantial equity in their homes. There is an opportunity to take advantage of these earnings and enhance your retirement plan with multiple opportunities.
Here is an example:
MR Mrs. Jones, both 70 years old, sell their current home for 1 million in Los Angeles County; Original cost of home: $ 250,000; MR Mrs. Jones decides to buy a house for $ 500,000 in Ventura County. Profit on sale: $ 500,000; Exclusion per couple filing joint return: $ 500,000; Taxable income: $ 0. Sir and Madam. Jones transfers his original property tax base with them, keeping his original property tax base. They take their $ 500,000 exemption and buy their Ventura County home with an FHA HECM reverse mortgage. The FHA HECM reverse mortgage allows them to pay between $ 300,000 and $ 320,000 for their $ 500,000 home, they have no mortgage payment, and they pocket the difference tax-free. Mr. and Mrs. Jones can also buy his new $ 500,000 home with a reverse mortgage and further increase his monthly cash flow by $ 6-700 a month if he opts for the lifetime tenure payment option.
These three opportunities will soon be available to many Southern California retirees. The capital gains exemption is available to everyone. As soon as HUD issues the green light, FHA reverse mortgages will be available for use in home purchases for borrowers age 62 and older, across the US.
The Boomer generation turned 62 this year. With the increasing popularity and practical application of reverse mortgages in the mainstream, it is not unreasonable to expect that the incorporation of these and other cash flow tools into retirement planning will increase.