MarketWatch tax columnist Bill Bischoff explains how a reverse mortgage can provide a better alternative solution to finance a retirement compared to selling a home that has appreciated greatly over time and would generate a big tax bill when sold.
“An unwelcome side effect of owning a hugely appreciated home is the fact that selling the property to raise cash can trigger a taxable gain well in excess of the federal home sale gain exclusion break — up to $500,000 for joint-filing couples and up to $250,000 for unmarried individuals,” says Bischoff. “The federal and state income tax hit from selling could easily reach into the hundreds of thousands of dollars, and all that tax money would be gone forever.”
Bischoff adds, “In contrast, if you can get the cash you need by taking out a reverse mortgage, the only cost will be the fees and interest charges. If those fees and interest charges are a small fraction of the taxes that you could permanently avoid by continuing to own your home, the reverse mortgage strategy can make perfect sense.”