Down Size With Reverse Mortgage, Move Your Tax Base & Take A Capital Gains Exemption? It's Possible

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're tired of maintaining the yard and you and your spouse only use half of the house. Could it be time to move and at the same time increase your retirement nest egg and cash flow?

The passing of HR. 3221 and the modernization of FHA and reverse mortgages is a step in the right direction in helping boomers and seniors plan for their retirement. The improvement is yet to be measured but here are some interesting thoughts.

Within the last couple of weeks the president signed into law HR 3221. Amongst many things, this law will do is dramatically change reverse mortgages. It will:

o Increase the loan limits for reverse mortgages (limits have yet to be defined publicly by HUD) - which means more liquid cash for reverse mortgage recipients.
o Capped origination fees - 2% of the first $200k of the maximum claim amount, plus 1% of the balance above $200k to a maximum origination fee of $6000. On average this will reduce origination fees by over $1200 for Southern California reverse mortgage borrowers.
o Enable to use the FHA HECM reverse mortgage for HOME PURCHASE
o Enable the FHA HECM reverse mortgage to used on co-ops, amongst other improvements

In 1986, California voted to provide tax relief (Proposition 60) to homeowners older than 55 by allowing (with some restrictions) to transfer their existing property tax base to replacement homes of the same or a lesser value within the same county or a participating reciprocal county (Proposition 90). As the boomers begin to retire and look to trade into smaller, age friendly single story homes, or consider 55+ communities, using this proposition may become more popular. You can use this benefit one time. There are numerous restrictions including a single person or spouse must be 55 years old when selling your original property. Your new property must be a principal residence with the current market value equal or less than your original residence. Proposition 60 covers property transfers within the same county. Proposition 90 allows property tax base transfers with participating counties of Alameda, Los Angeles, Orange, Santa Clara, San Diego, San Mateo and Ventura counties. Be sure to contact your tax assessor's office for current information.

Taxpayer Relief Act of 1997 changed the way real estate capital gains taxes are calculated. The IRS issued updates in 2003. This rule offers up to $250,000 tax free sales home profits for a single person and up to $500,000 profits for a couple. To qualify the seller must have owned and occupied their principal residence a total of two of the five years before the home sale. (Consult your tax expert for updated advice)

Even with today's softened housing market, many home owners have substantial equity in their homes. There is an opportunity to take advantage of these gains and improve your retirement plan with multible opportunities.

Here is an example:
Mr. & Mrs. Jones both age 70, sell their current home for 1 million in Los Angeles County; Original cost of home: $250,000; Mr. & Mrs. Jones decide to buy a home for $500,000 in Ventura County. Gain on the sale: $500,000; Exclusion for couple filing jointly: $500,000; Taxable gain: $0. Mr. and Mrs. Jones transfer their original property tax base with them, keeping their original property tax base. They take their $500,000 exemption and buy their home in Ventura County with a FHA HECM reverse mortgage. The FHA HECM reverse mortgage allows them to either pay $300,000-$320,000 for their $500,000 home, they have no mortgage payment and they pocket the difference tax free. Mr. and Mrs. Jones may also purchase their new $500,000 home with a reverse mortgage and further increase their monthly cash flow by $6-700 a month buy opting for the tenure payment option for life.

All three of these opportunities will soon be available to many Southern California retirees. The capital gains exemption is available to everyone. As soon as HUD issues the green light, FHA reverse mortgages will be available for use in home purchases for borrowers 62+ years old, throughout the USA.

The Boomer generation turned 62 this year. With the increasing popularity and practical application of reverse mortgages into the main stream, it is not unreasonable to expect to see the incorporation of these and other cash flow tools in retirement planning on an increasing basis.