Q: My husband and I built our own home 23 years ago, spending less than $120,000. We are thinking of moving west and believe that we can sell our property for $700,000 to $800,000. We figure it will cost us $10,000 to $15,000 to move. We have about $300,000 in the market which we hope will provide a small income. Other than Social Security, we have no retirement income. We hope to replace our home for $350,000 to $400,000. What are the tax ramifications?
H.M., Northern Virginia
A: With 23 years at the same address, you have easily satisfied the IRS requirement of living there as a primary residence for two of five years in order to qualify for favorable tax treatment. As a result, Jim Farrell, senior financial adviser for Univest Corp., Souderton, Pa., says that you won't pay taxes on gains of $500,000 or less. A single person is permitted to exclude gains of $250,000 or less.
Assuming that you sell the home for, say, $750,000, you would have a gain after the exemption of $130,000. That amount is taxable as a long-term capital gain, Mr. Farrell says. Such gains are taxed at a maximum of 15 percent. But individuals in the 10 percent or 15 percent income-tax bracket may be taxed at a 5 percent rate on part of this gain.
Whether the home you are now selling was already built, or you constructed it yourselves, you'll have to produce records showing what you paid. In addition, Mr. Farrell says you should keep tabs of all selling expenses, such as real estate agent commissions, to reduce your gain and therefore your tax bill.
Any losses in your investment portfolio can also be used to further offset the gain from your home as long as the investments are not in tax-favored retirement accounts such as an IRA. Just make sure the home sale and any portfolio adjustment occur in the same tax year.
As for moving costs, Mr. Farrell says that they are not deductible.
Q: I am 80, single, and have no beneficiaries. I want to buy an annuity to supplement my Social Security check with income from a $50,000 nest egg. Should I purchase an immediate or a deferred annuity? Should it be fixed or variable? I have no problem about taxes.
J.S., via e-mail
A: The big question you face, says Charlotte, N.C., certified financial planner Judson Gee, is how much cash flow do you need to supplement your Social Security? If you want to maximize income from that nest egg, then Mr. Gee thinks an immediate annuity may be best. It would immediately turn into a steady stream of fixed payments over a preselected period of years.
If maximizing the highest cash flow is not a concern, then Mr. Gee suggests a fixed annuity, with a 10 percent withdrawal feature. This would allow you to take the income from the interest generated, plus 10 percent of the principal each year without penalties or back-end charges. Because current rates are low, he would not lock in a long-term rate. He expects rates to continue to move up in 2005.
While you don't need a specific death benefit, which most annuities offer, you may decide a church or charity is a worthy beneficiary. If that's a possibility, then Gee recommends that you find an annuity that would allow a cash refund for the charity/beneficiary if you do not use all of the principal.