A future trend for Southern California Boomers? For Boomers and Seniors living in other areas, two out of three isn’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 of the house. Could it be time to move and increase your retirement savings and cash flow at the same time?
The HR step. 3221 and the modernization of FHA and reverse mortgages is a step in the right direction to help boomers and seniors plan for retirement. The improvement has yet to be measured, but here are some interesting thoughts.
In the last couple of 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 $200,000 of the maximum claim amount, plus 1% of the balance above $200,000 up to a maximum origination fee of $6,000. On average, this will reduce origination fees by more than $1,200 for Southern California reverse mortgage borrowers.
o Enable the use of the FHA HECM reverse mortgage for HOME PURCHASE
o Allow FHA reverse mortgage HECM 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 them (with some restrictions) to transfer their existing property tax base to replacement homes of the same or lesser value within the same county or a participating reciprocal country. county (Proposition 90). As boomers begin to retire and look for smaller, age-friendly single-story homes, or consider 55+ communities, using this proposition may become more popular. You can use this benefit once. There are numerous restrictions, including a single person or their spouse who must be 55 years old when selling their original property. Your new property must be a primary residence with a 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 in Alameda, Los Angeles, Orange, Santa Clara, San Diego, San Mateo and Ventura counties. Be sure to contact your tax advisor’s office for updated 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 provides up to $250,000 in tax-free earnings from home sales for a single person and up to $500,000 in earnings for a couple. To qualify, the seller must have owned and occupied their primary residence for a total of two of the five years prior to the sale of the home. (Consult your tax expert for updated advice)
Even with today’s weak real estate 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:
SR Mrs. Jones, both in their 70s, selling their current home for $1 million in Los Angeles County; Original cost of the house: $250,000; SR Mrs. Jones decides to buy a house for $500,000 in Ventura County. Gain on sale: $500,000; Exclusion for couple filing jointly: $500,000; Taxable profit: $0. Mr. and Mrs. Jones transfers his original property tax basis with them, keeping his original property tax basis. 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, have no mortgage payment, and keep the difference tax-free. Mr. and Mrs. Jones can also buy her new $500,000 home with a reverse mortgage and further increase her monthly cash flow by between $6 and $700 a month if she opts for the lifetime tenancy payment option.
All three opportunities will soon be available to many Southern California retirees. The capital gains exemption is available to everyone. As soon as HUD gives the green light, FHA reverse mortgages will be available for use to purchase homes for borrowers age 62 and older across the US.
The Boomer generation turned 62 this year. With the growing popularity and practical application of reverse mortgages in the mainstream, it’s not unreasonable to expect to see these and other cash flow tools incorporated into retirement planning on an increasing basis.