SMART MONEY: Capital gains taxes could complicate move
DEAR BRUCE: We have a reverse mortgage. I am 80, and my husband is 82. We live on a lake.
We have a lot adjacent to our property that is not covered by the reverse mortgage and is worth $100,000 if we can add 17/100ths of an acre to the lot to satisfy septic requirements. The reverse mortgage people stated that they will not release even one square foot because of its tie to federal insurance.
My husband is beginning to suffer from dementia, and I feel the need to move closer to medical facilities and a home that is less physically demanding in its upkeep. We have no equity in our home because in the past two years, the interest on our reverse mortgage has added more than $20,000 to its cost. We owe $327,000 on it if we sell.
If we sell and receive the $100,000 for the adjacent lot to buy another modest home in town, we will still have to take probably $50,000 from our IRA. At that point, we will have a home free and clear with lower expenses.
How do we do this without incurring such horrendous tax bills on the lot sale (for which we will have to pay capital gains) and IRA withdrawals that we will have no money left as a reserve? — N.B.
DEAR N.B.: Put your primary home up for sale. When it is sold, the proceeds from the reverse mortgage will pay off all you owe and perhaps provide a little cash as well.
You mentioned you don’t have any equity in your home. That’s unfortunate; lake properties aren’t the hot ticket they once were. You could ask for relief from the lot size requirements from the board of adjustment. Then perhaps you could sell the adjacent lot for $100,000.
As far as capital gains, I don’t know if there are gains that can be avoided. That is a question for a tax specialist. I am certain you can find one who knows all the ins and outs. He or she may be able to offset at least a portion of the capital gains.
DEAR BRUCE: My wife and I are both retired, and our pensions are pretty much set. We each have $45,000 term policies, which are getting more expensive as we get older. We kept these policies so the survivor can pay down the mortgage on our house, but now we owe approximately $49,000 on the house and have more than enough in retirement investments to pay it off. I don’t know whether to keep the policies in force or to cash them in. — Larry
DEAR LARRY: You say the insurance is getting more expensive as you get older, and that’s true, but on the other side of that, the idea of having money to pay for the house if one of you cashes in a little bit early is a wise idea.
You haven’t told me how much the payments are, but I suspect they look large, particularly due to the lower premium you were paying some years ago. It may well be that you want to extend the policy to an older payoff age even though that will increase the payments.
On balance, unless it’s a very severe burden, I would keep the life insurance in place.