Ask Brian: Should Equity Rich Baby Boomers Cash Out?

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to askbrian@realtybiznews.com.

Question from Sandy in VT: Hi Brian, We have more than $260,000 of equity in our house today and we are afraid the white hot seller’s market is fading fast. We don’t want to see that huge chunk of cash on paper also fade away. We are at retirement age and think this might be our one chance to cash out for this large of a profit. We want to sell quickly to lock in the profit at today’s value. The problem is that we don’t where we would live or what we would do. Can you help with some ideas to solve our homeless problem?

Answer: Hello Sandy. That’s a great question and one that I think a lot of baby boomers are asking themselves right about now. It’s also a question where one answer will never fit all. The good news is that there are several viable solutions that you can consider. I’ll cover a few of them.

This first is pretty radical. I know a couple that sold their house for a $185,000 profit several months ago. They don’t have any plans of buying another house any time soon. The good news is that they won’t have to pay taxes on the capital gain from the sale of their primary residence. The IRS rules say that you can exclude up to $250,000 of that gain from a single filer’s income, or up to $500,000 of that gain if you file a joint return with your spouse.

What this couple did is buy a luxury motor home with a large part of the profit. They consulted with a financial advisor and invested the balance in a S&P mutual fund alongside their 401k accounts for retirement. For tax purposes, the mutual fund and 401ks are separate accounts. I’m not sure how well that worked for them now the stock markets are crashing but that is what they did. And then they hit the road in their new motorhome. The last time I talked to them, they didn’t have a plan for when they got tired of living in a motorhome, but they were comfortable knowing they had somewhere to live and the opportunity and savings to do a lot of traveling before they got any older.

I’ve also heard about a few couples that sold something like a 3,600 family home in the north for a tidy profit and headed south where the cost of living is a lot less. It’s not just the cost of another house that is much cheaper. One couple left their annual $24,000 property tax bill up north also. Altogether, that couple shaved around $3,000 off their monthly housing costs, which is why they were able to retire about six years early.

Sandy, although homeowners of all ages can leverage this equity to sell for big profits, it’s baby boomers who are uniquely poised to take advantage of these gains. Many baby boomers have lived in their homes for decades and, in many cases, paid off their mortgages completely. Some are seeing a unique opportunity where their properties have appreciated to a point that they never even thought possible in their lifetime.

Another option that I’ve heard about is renting in a 55-and-up community. For those not wanting a long-term commitment, there are resort-style senior living communities with multiple locations that allow you to stay on a month-by-month basis.

But before doing anything drastic, it is wise to carefully consider all the ways that those profits can help baby boomers achieve any number of financial goals, from padding their nest eggs or making investments to buying a new house or even retiring early. According to a survey from Realtor.com, around 12% of baby boomers plan to sell their homes soon — a larger share than any other generation surveyed. Many will choose to rent, opting for lower-maintenance apartments or townhomes. Others will buy but downsize, and still, others will use the funds to move closer to grandkids or to sunnier climates.

This is a smart time for some older homeowners to sell their homes — but only if they have a clear plan of where they are going and what they will do. While they can get a premium for their current home, they will also pay a premium for their next home. Selling fast without a clear plan could end up being costly over the long term.

What ideas do you have for baby boomers positioned to make a big profit on the sale of their homes? Please comment with your thoughts.

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