Is Your Retirement In Danger?

Dear Rich Lifer,

Is your home an asset or liability?

Generally speaking, financial planners count your home as a personal asset. But they don’t typically count the equity in your home as potential retirement income.

The reason for this is simple – you need a place to live!

But for 60% of Americans behind in their retirement savings, a different strategy ought to be considered.

We suggest you learn how to leverage your home and the equity in it to help meet your retirement goals faster.

The best way to tap into the equity in your home and accelerate your retirement savings is by leveraging Tax Topic 701.

How to Pay Zero Capital Gains Tax

According to IRS Tax Topic 701, if you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.

You read that correctly. You can buy a house, live in it, sell it, and pay no taxes up to half a million dollars! To qualify, however, you need to pass two tests, the “ownership test” and a “use test.”

Basically, you have to own the home and have lived in it two of the past five years to qualify.

For example, let’s say you and your spouse bought a house for $450,000, lived in it for 3 out of a five-year period, and then sold it for $800,000. In the eyes of the IRS, your gain of $350,000 would be free from income tax.

You’re probably thinking, that’s great but where will I live?

This is where things get interesting. There are all kinds of creative ways to take advantage of this simple tax break.

Here are 7 ways you can leverage your home to reach your retirement goals faster.

  1. Downsize and Invest the Difference

Some of the advantages to downsizing are you’ll save money on heating and cooling costs, your insurance will be less, property taxes lower, and generally smaller homes require less upkeep.

Plus, if you take advantage of Tax Topic 701, you can invest your capital gains from the sale of your house and boost your retirement income.

Alternatively, you could rent. The only drawback to renting is you’re on the hook for a rent check every month.

But, you have to live somewhere, and depending on where you choose to live, you might find renting to be cheaper than owning another home. Renting also frees up more cash to invest, so there’s that to consider as well.

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  1. Change Zip Codes

Another option after you sell is to move someplace less expensive. For example, Texas and Nevada are both states with no income tax.

Moving to a different state is a big decision. But there are all kinds of resources available to help you compare the pros and cons to living in different states and municipalities.

.Generally, college towns offer retirees the best bang for your buck. But a quick Google search for “cost-of-living calculators” will show you just how far your dollar will stretch in different states.

  1. Sell Your House and Move Someplace Exotic

If you want to guarantee your kids and grandkids will come visit you, retire someplace exotic. A move to Costa Rica, for example, is less expensive than you think and offers a host of benefits. You can rent a two-bedroom home for $500 a month.

And with Zoom, Skype, and Facetime, it’s easier than ever to keep in touch with friends and family. Plus, like we said, you won’t be begging your kids to come visit, it’ll be the other way around!

  1. Live Rent-Free as a Building Manager

Not too many people talk about this but there are several opportunities for retirees to live rent-free in a condo or apartment building if they’re open to managing the building.

If you have a knack for fixing things and you’re friendly, this could be a dream retirement gig. Many building owners need reliable building managers. And they can often save some money by bartering with a tenant to live rent-free in exchange for their services.

Selling your home and living rent free means you can invest all the capital gains from your sale. This could be a smart move early in retirement.

  1. Move In With Your Kids

Not everyone likes the idea of living with their family, but if you can make it work, you’ll save a lot of money.

There’s a trend in multi-generational homes happening. Typically it’s kids moving back into the homes of their parents. But, more families are warming to the idea of having an elderly parent or parents live with them to help out around the house.

Living with your kids might look like picking up your grandkids from school or baseball practice. Or maybe helping make meals on weeknights to take the stress off the week. Either way, you get to spend quality time with your family while enjoying retirement.

  1. Age In Place With a Roommate

If you love your home and never want to move, consider renting out a room to help offset some of your living costs.

Depending on who you rent to, they may even be able to help with some of the more manual labor intensive chores around the house, like mowing the lawn, cleaning the gutters, and shoveling the driveway for a reduced rent.

This can be a win-win situation since you can stay in your home while someone else gets to benefit from a reduced rent in exchange for helping you around the house. AirBnB and SilverNest are both good digital tools to help you find a roommate.

  1. Take Out a Reverse Mortgage

Reverse mortgage is last on our list because there are so many other creative ways to fund your retirement with your home.

However, the simplest way to free up some extra cash is to take out a reverse mortgage on your house. You can either tap your home equity as a lump sum or line of credit.

You can also take out what’s called a home equity conversion mortgage, which is insured by the government. To qualify, you must be over the age of 62.

The catch with any reverse mortgage is you need to be able to maintain your home and pay the taxes and insurance. Otherwise, you risk foreclosure. When you eventually sell (or your heirs do), the loan is paid off and any remaining equity is yours to keep.

The biggest drawback to a reverse mortgage are the closing costs, which can be significant. But if staying in your home is important to you, a reverse mortgage is a viable option.

There are a number of ways you can leverage your home to retire faster. Don’t feel like you have to work until you’re 75 before you can retire!

To a richer life,
The Rich Life Roadmap Team

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