Dear Liz: My wife and I are 68 and 69, respectively, have been retired for more than a decade, and enjoy a comfortable retirement income from my pension and her Social Security (I’ll take mine at 70). We have no mortgage and enjoy steady growth in our retirement savings, which we rarely touch.
Both of our children have good, steady jobs but may never own homes here in California owing to extraordinarily high prices. My wife and I own our home outright and could generate north of $1 million in proceeds from its sale. Our children will inherit all of our assets, including the home, when we die, but we’re wondering “why wait?” Why not help them purchase homes now by selling ours and splitting the proceeds between them for meaningful down payments? We’re happy to rent if it means they can enjoy the benefits of home ownership now rather than later when homes will surely be even more expensive. Good idea or bad idea?
Answer: This could be a lovely idea or a disaster, depending on your circumstances and what the future may hold. If you or your wife need long-term care in the future, for example, you may regret cashing out this valuable asset.
Renting carries risks, as well. You could face potentially rising costs each year even in areas with rent control.
Also consider that selling your house could generate a significant tax bill. Your gain is generally the sale price minus what you paid for the home, certain selling costs and the cost of qualifying improvements you’ve made over the years.
You and your wife can exclude up to $500,000 of the gain, but the remainder likely would be taxable. The federal capital gains tax rate is usually 15% but can be up to 20% for those with high incomes. California doesn’t have a separate capital gains rate so you’d face an income tax rate of up to 13.3%.
If your children inherit the house instead, its tax basis generally would be adjusted to its value at your death, eliminating capital gains taxes on appreciation during your ownership. Of course, that could mean they’d have to wait decades for their inheritance, which would defeat your expressed goal of helping them buy homes now.
You may not have to give up homeownership yourself to make it possible for your children. Downsizing could help you free up cash for significant gifts, for example. (Gifts of this size generally require filing gift-tax returns, although you likely wouldn’t owe gift tax. The federal lifetime estate and gift tax exemption is currently $15 million per person.)
A fiduciary financial advisor could help you determine how much you can safely afford to give away without jeopardizing your own future. A tax professional or estate-planning attorney can help you structure any gifts in a tax-efficient way.
Dear Liz: I’ve heard too many delayed refund stories to trust the process, so I always request that my overpayment be applied to the following year’s taxes, which allows me to stop withholding on IRA required minimum distributions via Form W-4R and stop making estimated tax payments until I’ve “used up” the amount of my refund. When I was administrator of a loved one’s estate, it took the IRS nearly two years to issue a refund, and that was before government cuts under Department of Government Efficiency (DOGE).
Answer: Your approach is one often recommended by tax pros, who have their own stories of trying to wrestle refunds out of an agency hollowed out by budget cuts and layoffs. You can still face problems if the IRS delays or fails to apply your overpayment as requested.
Also, the choice generally can’t be reversed. Make sure you won’t need the money and that you’ve paid enough to avoid underpayment penalties.
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Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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