Question: We own a single-family house in a quiet suburban neighborhood. Our children are grown and we are considering putting our house on the market. We want to downsize, and perhaps even move down South. How do we go about selling our house?
Answer: The very first thing I would do is to determine the taxable consequences should you sell your house. Most houses have significantly appreciated over time, especially within the last few years.
Let’s look at this example: Your purchased your first home in 1960 for $25,000, and sold it in 1970 for $75,000. Although you made a profit of $50,000, you took advantage of the rollover law then in existence and did not have to pay any capital gains tax. In 1970, you bought the house in which you currently live for $100,000. However, the profit that you made was rolled over into this new property, and the basis for tax purposes is $50,000 ($100,000 – $50,000).
Now, the house is worth $900,000. If you sell your home at that price, you will have made a profit of $850,000 (for purposes of this discussion, I am ignoring such costs as commissions, settlement fees or improvements — all of which can be used to increase your tax basis and reduce your capital gains tax exposure).
Under the laws in existence today, you can exclude up to $250,000 of gain if you are single or $500,000 if you are married and file a joint income tax return. In your case, you will have to pay capital gains tax on $350,000 ($850,000 – $500,000). The current capital gains tax rate is 15 percent, so when you sell your house you will have to pay Uncle Sam $52,500. And don’t forget that you will also have to pay tax in the state where your property is located.
Once you have determined the taxable consequences of selling, the next question is: Do I really want to sell? Should I keep the house as an investment? Is the house in a neighborhood where property continues to appreciate? Are there good schools in the area? Is public transportation accessible? Do I need the money to purchase a new home or can I afford to get a loan for that new property?
These are questions which you should consider before making the decision to sell. While no one believes that the real estate market will continue the phenomenal growth which has occurred in the past few years, in my opinion, real estate is still a good long-term investment.
But you have decided that you do not want to be a landlord and want to sell rather than rent. Now, you have to consider the logistics of this transaction. Which comes first: sell your current house or buy the new one? Clearly, the ideal arrangement is to buy another house first, so that you will have plenty of time in which to get it ready to move in when you ultimately sell your current residence. However, that will require money.
Talk to a mortgage lender? Can you afford to purchase another house without selling your present residence? Can you get a bridge loan on your old home?
These are important questions which should be seriously considered before you put your house on the market. I have encountered numerous situations where sellers have had to move in with friends, relatives or even to a hotel because they did not have a new place to live when their house was sold.
Next, you will need to determine the market value of the house. Talk to several real estate brokers and get their opinions. In many jurisdictions, home sales prices are listed on government websites. You may also want to retain an appraiser to give you a ballpark of what your house is worth.
If you decide to use a real estate broker, you will have to sign a “listing agreement” with that company. Read the document carefully. Here are some tips on what to include in that agreement:
- Do not give the broker a listing for more than 60-90 days. If your house does not sell during the listing period, but you are pleased with the services you are getting, you can always extend the listing. But if you are not happy with the broker, you want to be able to terminate the relationship if necessary.
- Get a written statement as to how often the broker will hold an open house to show your property to the general public.
- Include language in the agreement that the real estate commission will only be earned if settlement actually takes place. The standard listing agreement provides that the commission is earned when the broker finds a buyer who signs a real estate contract; if the buyer defaults and does not go to settlement, the commission is nevertheless still owed to the broker.
Before you put the house on the market, you also have to determine if there are any repairs which should be made. Clearly, roof leaks, plaster cracks or peeling paint should be corrected. You want the house to show in good condition in order to get the best possible price.
You should also have a neutral third party (a friend, relative or even the real estate broker) walk through the house and get an assessment as to how it looks. Keep in mind that you have been living there for many years. What you consider attractive may be considered hideous to a stranger. Is there too much furniture in the living room? Is there enough light in the bedrooms? Do the pots and pans hanging all over the kitchen detract or improve its appearance?
There are many issues which you must consider when deciding to sell your house. This column can only highlight some of these questions. If you decide to use the services of a real estate broker, you certainly can rely on their expertise — but only up to a point. You still need to rely on other professionals for assistance and guidance. Specifically, before you sign any contract presented to you (whether or not you use a real estate broker) your lawyer and your financial advisor must review that document.
You should also keep in mind that many buyers get “buyer’s remorse” immediately after they sign the real estate contract. You need to make sure that your contract is iron clad. Every state has legal requirements which must be met in order to have a legally binding real estate contract — such as seller disclosure laws, lead paint or underground storage tank disclosure requirements. A competent real estate attorney can often find a loophole in a real estate contract so as to relieve a buyer from having to go to closing. You want to make sure that you are similarly protected.
Written by Benny L. Kass
Shannon Aspeslagh 