Considering Selling Your House

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Selling your Home
For most people, the biggest chunk of their asset is the home. When it comes time to sell the home, there can be emotional and financial ramifications to consider. Leaving a home where one has accumulated a lot of memories is a not an easy decision. It can be hard to let go. However there comes a time when the home is not functionally efficient for the senior. It can become too big to manage, unsafe for the senior or too lonely to live in. One may also need the money to pay for other expenses. Whatever the reason, selling the home is an important one and it should be handles as such.

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. You need a real estate agent to help you with the sale but you have to remember that the real estate agent is not a financial planner or tax advisor. You need help making decisions about an effective price for your home (here a real estate agent can help), tax implications of the sale (here you need a tax attorney or accountant) and closing the transaction (in most regions, an attorney does the closing while in some areas, closing agent are used).

A common mistake that many people make in considering the price of a home is looking only at the selling price. The more important value is what goes into your pocket after transactional and tax fees have been deducted. 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. It is usually a good decision to consult a financial planner before deciding to sell a home.