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To check the present value of your home, you should get an estimate of its selling price from two or three local realtors. You also should get an estimate of the cost of your replacement home by shopping for the desired type of home.
In addition to estimating the amount of cash you will net from trading down, you also should estimate the annual housing cost savings that trading down will provide for you. To make the estimate, compare the annual costs of maintaining your present home with the annual costs of maintaining the new home. Estimating the annual cost of maintaining a home should include a
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prorated portion of expenses that do not occur regularly, such as indoor and outdoor painting and roof repairs.
It usually is advisable not to purchase your replacement home until after you sell your present home, or at least enter into a contract to sell your present home. If you purchase your replacement home before you sell your present home and donâ€™t quickly find a buyer for your present home, you would incur costs for maintaining two homes.
If you choose to rent rather than purchase a new home, the amount of cash that can be added to your income-producing assets will be further enhancedâ€” $400,000 in the preceding example. Figuring the benefits of trading down then must take into account the enhanced investment income, eliminated house expenses, and future estimated rent.
9.5 The Tax Benefit
Even after you retire, your home remains a tax shelter.
While payouts from individual retirement accounts (IRAs) and pension and profit-sharing plans generally are subject to substantial current income
Balancing Burdens and Benefits. There can be disadvantages in trading down, such as an unwelcome reduction in living space or a less attractive home. Perhaps the most common problem with trading down occurs if you are strongly attached to your present home. If you are familiar and comfortable with both your house and your neighborhood, you may not want to be â€śuprootedâ€ť from your present home and its surrounding social network. Nevertheless, regardless of how attached you may be to your home, you probably also are troubled by the worries that afflict most older homeowners. These include rising property taxes, the threat of escalating insurance, utility and repair costs, and the lurking, unexpected cost of major repairs such as a new roof or plumbing. You may decide that trading down from a larger house to a smaller house or condominium is warranted to lighten not only your financial burden, but also the worry of home ownership.
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tax, the cash produced from selling your principal residence at a gain when you trade down normally will be completely free of income tax. This is because the gain on the sale will qualify for the exclusion of gain on the sale of a principal residence, up to $250,000 for single individuals or $500,000 for married couples. (See Sections 4.3 through 4.9.) The principal residence gain exclusion break will make most trade-down transactions entirely free of federal income taxes.
9.6 Tax-Free Reverse Mortgages
They say thereâ€™s no free lunch, but the reverse mortgage seems to come close. It provides the homeowner with a stream of tax-free income that the homeowner need never repay, and it permits the homeowner to continue living in the home for life. For many retirees, this happy combination of increased cash flow and secure home ownership seems to create the ideal way to supplement retirement income.
For many retirees, it is. But to understand if it works for you, you should understand what a reverse mortgage is, take a close look at the critical question of how much cash flow you can get from a reverse mortgage, and know about the different types of reverse mortgages. The discussion that follows presents a concise overview of these factors. Then, if it seems that a reverse mortgage is right for you, you should get additional information about reverse mortgages. A good starting point for this is at the web site of the American Association of Retired Persons (AARP) at www.aarp.org/revmort.
AARP Web Site. AARPâ€™s web site includes an online calculator permitting an estimate of the amount of funds that can be provided by a reverse mortgage. The estimate is obtained simply by inputting your birth date and the zip code for your home and its value. The site also has a collection of other useful information about reverse mortgages.
9.7 What Is a Reverse Mortgage, Anyway?
A reverse mortgage is a regular home mortgage turned on its head. With a regular mortgage you make monthly payments to the lender, reducing the amount of the mortgage with each payment. The reverse mortgage is, as the name im-
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plies, the reverse: You receive monthly payments from the lender, increasing the amount of the mortgage with each payment you receive.