DEAR BOB: My wife and I are over 60. We are trying to decide whether to buy a condo at around $300,000 or invest that amount and rent at $1,600 with utilities paid. We would invest the money from the tax-free sale of our $600,000 home – Jack S.
DEAR JACK: You have a wonderful problem. On an out-of-pocket financial basis, it appears renting the $1,600 apartment is the best deal. But today’s low rent won’t remain fixed. Neither are the costs of owning a condo guaranteed.
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Perhaps the experience of my parents will help. When they sold the home I grew up in (without my permission, while I was away at college, but that’s another story), they rented a nice luxury apartment. But a few years later, their apartment building “went condo.” Rather than purchase, they moved to an adjoining rental apartment building.
However, that building soon “went condo.” At that point, I stepped in and strongly told them to buy their unit with a minimum 10 percent cost down payment and a 90 percent mortgage. Shockingly, they followed my advice.
Years later, my mother, who was the “shrewd investor” in the family, thanked me for “forcing” them to buy. Although she earned a small fortune in the stock market, she admitted the profit on the condo’s appreciation in market value was, percentagewise, the best investment she and dad ever made.
I fear if you rent, and don’t own your retirement home, you might get into the same situation. The problem is rents are soft now in most towns. But they will eventually go up. Instead, if you buy a retirement condo, you at least have some control over future costs and the condo is very likely to appreciate in market value.
LIVING TRUST AND JOINT TENANCY ARE NOT COMPATABLE
DEAR BOB: My unmarried partner and I set up revocable living trusts to ensure each of us will not have any legal entanglements with relatives when one of us dies. However, our primary and vacation homes are set up as joint tenancy with right of survivorship. My understanding is if we both die at the same time, such as in a plane crash, the homes will go into probate. Can there be two separate trusts for our homes without paying transfer taxes? – Cynthia M.
DEAR CYNTHIA: Something is wrong with your description. You and your partner might have set up revocable living trusts, but if you still hold title to your primary and vacation homes in joint tenancy, those properties are not affected by your living trusts.
Yes, if you and your partner both die at the same moment in a plane crash, then your joint tenancy properties become subject to your individual wills which, in most states, must then pass through probate court costs and delays.
Instead, why not hold title to your primary and vacation homes in your living trusts? Until you transfer the titles into your revocable trusts, those trusts are unfunded.
As for your question about transfer taxes, please ask the local tax collector if such a title transfer into your living trusts will require payment of a transfer tax. That modest fee might be much less than probate costs. For full details, please consult a local real estate attorney.
DON’T KNOCK DOWN YOUR HOME TO SUPER-SIZE IT
DEAR BOB: My wife and I own a modest 2,300-square-foot house in the middle of a double lot. Our neighborhood of similar homes is slowly going to “super-size” homes on modest lots. We have received several unsolicited offers from home builders offering us fantastic prices for our property. They want to knock down our house and build two huge houses. As we are nearing retirement, we listened seriously to their offers. As our net profit will be slightly under $500,000, it will be tax-free. Should we sell or should we knock down our house and build two houses on our two lots to reap the profit? – Herb H.
DEAR HERB: Unless you are an experienced home builder, I suggest you consider selling to a home builder and let him take the risk of building two houses on your double lot.
If you get involved in home building, you would lose the $500,000 home sale tax exemption of Internal Revenue Code 121. That is presuming you owned and occupied your principal residence at least 24 of the 60 months before its sale.
Considering the risk and loss of your $500,000 tax exemption, the decision is obvious. For full details, please consult your tax adviser.
The new Robert Bruss special report, “2005 Realty Tax Tips: 8 Chapters of Tax Savings for Homeowners and Investors,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.
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