Should You Keep or Sell the Family Home?

deeproot November 19, 2019

Real Estate

Should You Keep or Sell the Family Home?

4 Expensive Mistakes to Avoid

After months of decluttering, organizing, and packing every inch of your home, you’re finally ready to put your house on the market and start your senior downsize. Before you make the move, you have to decide: Are you going to sell your old home or keep it in the family?

The decision to keep or sell a family home is a highly emotional one, especially when you’ve raised a family there. If you let your emotions guide your decision making, however, you could end up in serious financial trouble. Here are some of the most expensive mistakes seniors make when it comes to the family home.

1. Signing It Over to the Kids

You know you want your kids to get the house, so why wait? Unfortunately, this line of thinking could leave your kids with a giant tax bill — or worse. Since gifts don’t trigger a stepped-up tax basis, capital gains taxes will be assessed based on the home’s value when you purchased it, not when you transferred it to your children.

2. Selling to Family for Less Than Market Rate

Since a property’s tax basis is stepped up when it’s sold, some seniors try to skirt the rules by selling to family for less than the market rate. However, selling a property for less than 75 percent of its fair market value may cause the IRS to flag the transaction for capital gains tax avoidance. The difference between the sales price and fair market value is subject to gift taxes.

3. Overextending Your Budget

Transferring property upon death is the easiest way to avoid tax issues, but in order to do that, seniors have to maintain the second residence for the remainder of their lives. That means paying twice the property taxes, homeowners insurance, and possibly even twice the mortgage payments. Even if it looks like you can afford both homes on paper, consider how the added expenses will impact your quality of life in retirement, especially if you face medical bills or other unebxpected expenses in the future.

It’s not only the ongoing costs of homeownership that you need to consider. Holding onto your first home also makes it harder to purchase the second. In addition to increasing your debt-to- income ratio and making it harder to qualify for a second mortgage, keeping your first home means you have less money to use for a down payment, closing costs, and moving expenses. Don’t underestimate that last bill — while you may have moved all by yourself in the past, trying to pack and move an entire house in your 60s is simply too stressful and physically demanding.

4. Waiting Too Long to Sell

If you anticipate that you may need to sell someday, it’s better to do it sooner rather than later. Not only are baby boomers’ homes expected to flood the market in a few years, driving down costs, but if you wait too long to sell, you’ll be responsible for the full capital gains tax bill when you do. While the capital gains tax exclusion allows single and married homeowners to exclude up to $250,000 and $500,000 in capital gains, respectively, sellers may only claim the exclusion if they have lived in the residence for at least two of the five years prior to selling.

If you’re worried about whether the market is too lukewarm, research listings in your area that are comparable to your home, this is something we do every day, and we’d be happy to put together a basic report for you. You’ll also want to find out the average days on market, average sale price, and the typical number of offers received. In Lake Oswego, for example, Redfin notes the average sale price last month was $596,000, most homes received an average of one offer and the average days on market was 37.5. Having this information and consulting with a real estate team like ours can help you make the best decision, potentially avoiding a missed sale opportunity.

The right choice for your home depends on your overall financial picture, but whatever you do, don’t wait to decide. For the best tax treatment, seniors should deal with their family home within a couple of years of downsizing. Whether that means selling to family at market rate, including it in your estate plan, or putting it on the market, you’ll be glad you moved quickly.

We are happy to field your questions or refer you to the proper expert! Email us at [email protected].

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