Renting vs. keeping owned primary residence after retirement?

[ashok_sharma]

Hello friends. Looking for advice. I am 67 yrs and DW is 60.5 years. I have 401K for about $370K and a traditional IRA for $170K. We own a 3 BDRM Single Family Home in the Bay Area that is currently valued at $1.5M and we still carry a loan on the house for about $399K. The property tax on the house is $12.5K and increasing almost every year. I am planning to retire somewhere between age 70 - 72. Ar age 70, I become qualified for the highest amount in Social security of about $3,450. Also, at that age, I would be on the hook for RMD for an approximate amount of about $19,300 per year so annually getting about $60,700. My question is does it make sense to sell the house and invest the funds in Roth IRA and move into a smaller place either in California or Vegas. Most of our friends are here in California, whereas, Vegas seems to be fascinating for lower house cost, no property taxes, no state income tax, and a very low property tax. The only drawback is hot summer months ( July & August at least) and no friends and no good hospital close by.



I would like to learn from you if any one here have any experience in this or have moved in this direction of selling the primary residence and moving to a rental house or purchased a house in Vegas?

 

[RunningBum]

My question is does it make sense to sell the house and invest the funds in Roth IRA

I don't follow how you can invest the funds in a Roth. You can convert tIRA funds to a Roth, and you can contribute to a Roth if you have earned income. You can just put proceeds from a house sale into a Roth.

As far as the Vegas vs. Cal decision, that's your own call. You don't give enough information on your finances to tell if it's a necessity. If it is, do what you have to do. Otherwise, take a couple trips down there and rent an airbnb and live for a week or two like a local and see how you like it.

 

[ashok_sharma]

Hi RunningBum, Thanks for your response. I was only planning to put the proceeds after selling the home as $500K for a couple are tax free+ Home equity+ leftover after paying taxes and move all of it into RothIRA where any growth wouldn't be taxable if I understand it correctly.

 

[CardsFan]

1. We have several family members that have relocated from the Bay area to Reno area. They seem happy that they could buy a bigger house, and bank some proceeds. And they have Tahoe less than an hour away (one has a Condo there, as well)

2. You cannot invest your house sales in a Roth, unless you have the income to do so, and even then, you are limited. It cannot be converted.

 

[RunningBum]

Hi RunningBum, Thanks for your response. I was only planning to put the proceeds after selling the home as $500K for a couple are tax free+ Home equity+ leftover after paying taxes and move all of it into RothIRA where any growth wouldn't be taxable if I understand it correctly.

No, you can't do that.

 

[38Chevy454]

But couldn't OP use the house sale proceeds to pay for the tax due on back door Roth IRA conversion of the pretax 401k amount? Using $400k of conversion and 25% tax bracket, the tax would be approximately $100k. This might be best spread over several years to take advantage of lower tax rates once retired.

 

[Vacation4us]

I don’t think you can afford to stay. When did you purchase your home? 12.5 k in property taxes is high for a Californian who has lived in their home for a long time and presumably payed a lot less than 1.5 million.

You could live well purchasing a home outright for far less and combining some money from the sale of your home and your 401 k. Your mortgage debt at $399 k makes your combined PITI what 3 k/ month?

I would definitely sell and move, but I despise it up here and can’t wait to return to SoCal.

If you truly are in SanFrancisco run, find peace and no poop or needles.

You can’t put the proceeds in a Roth. The limit on a self funded Roth ( not work ) is only 6 k an employer Roth 25 k.

 

[ashok_sharma]

Vacation4us,


Thanks. I live in the suburb in San Jose area. I guess I was not aware that I could not land the proceeds from the home sale to Roth IRA. Maybe I just have to put in an online trading site to invest these funds as bank would literally give you nothing in return.


Purchased my home in 2005, so it did appreciate as I paid $875K . I strongly feel that I do not want to have a hassle of owning a home in California for sure as the home prices and property taxes are ridiculously high. Also the maintenance and upkeep cost can also be a hassle. So , I was thinking to rent as that will give me freedom to change or move if I want to and travel with my DW that we have done much in so many years. My 2 kids are grown up but not married yet , so they may also move out of California right now they both are living in San Francisco.

 

[Sunset]

OP - By now you know you cannot put the house sale proceeds into a ROTH or IRA.

It is true that you won't pay any capital gain on the first $500K of the sale above purchase (and upgrading costs), but the rest will be subject to capital gains.

The money from the house sale can go into a regular brokerage account, where you can buy low cost broad ETF's (which is another whole topic).

You didn't mention your DW, will be eligible for SS in about 5 years (full retirement age), which is about 2 years after you start SS.

 

[Sunset]

Now I see the house basis, so it's like this:

1500000 sell price −399000 mortgage −875000 basis = $226,000 tax free profit. (and $875,000 return of investment)

 

[ashok_sharma]

OP - By now you know you cannot put the house sale proceeds into a ROTH or IRA.

It is true that you won't pay any capital gain on the first $500K of the sale above purchase (and upgrading costs), but the rest will be subject to capital gains.

The money from the house sale can go into a regular brokerage account, where you can buy low cost broad ETF's (which is another whole topic).

You didn't mention your DW, will be eligible for SS in about 5 years (full retirement age), which is about 2 years after you start SS.

Exactly, I am thinking to put the proceeds in brokerage to get soem mutual funds and ETFs.


DW, probably would be better off getting 50% of my SS at FRA that would happen at her age of 66 yrs 10 months at the end of 2025. Her own SS is about $1,100 only.

 

[Montecfo]

Now I see the house basis, so it's like this:

1500000 sell price −399000 mortgage −875000 basis = $226,000 tax free profit. (and $875,000 return of investment)

The loan is not part of the basis.

 

[ashok_sharma]

The loan is not part of the basis.

The way I see it, correct me if I am wrong that if the house sells for $1.5M less let us say the loan is $400K, Net would be $1.1M, Less Credit for sale for a couple is $500K. The maintenance and upgrade cost is around $200K. So the taxable amount would be $400K @about 15% if I sell after retirement would be about $60K. So net after taxes should be $340K+ $500K (around $840K). I welcome any comments if what I am thinking is not correct. We are planning to leave about $400K for our 2 kids and rest as savings for retirement that we can invest in a brokerage.


PS: The tax rate may be higher even after retirement if the gain is about $400K. No sure about it.

 

[Doribe]

I would do the calculation as follows:

Calculation for taxable gain
Sale price - original cost - improvement costs - sale expenses = net gain
$1.5M - $875k - $200k - $100k = $325k
since less than $500, therefore no capital gain tax

Calculation for cash flow
Sale price - sale expenses - mortgage - tax liability = net cash
$1.5M - $100k - $400k - $0 = 1.0M

I added in the expenses because they are significant in my area, if this doesn't apply to your situation, adjust accordingly.

 

[timbo]

I would do the calculation as follows:

Calculation for taxable gain
Sale price - original cost - improvement costs - sale expenses = net gain
$1.5M - $875k - $200k - $100k = $325k
since less than $500, therefore no capital gain tax

Calculation for cash flow
Sale price - sale expenses - mortgage - tax liability = net cash
$1.5M - $100k - $400k - $0 = 1.0M

I added in the expenses because they are significant in my area, if this doesn't apply to your situation, adjust accordingly.

Yes, this is how the calculation should work. The amount of the mortgage is not a factor.

Based on the fact that you are interested in moving it makes sense to sell fairly soon and rent or buy someplace cheaper. You won't pay taxes on the ~$1 million you receive from the sale but you will pay taxes on any interest or returns from that money in the future.

 

[flyingaway]

I also like to move to Las Vegas because I like to play in casinos very much.
Do you have an idea about the rental information there? As the title of the thread is renting vs. keeping primary house?

 

[ashok_sharma]

Hello Friends, I thank all of you who have given your valuable advice and time to answer my questions. Appreciate it.

 

[smalltownguy1]

I retired 3.5 years ago. I have a paid for,small cabin on a private lake in east Texas. It is home bass as I travel 2-3 weeks a month. I bought it 13 years ago and have only lived in it full time since the beginning of the year when I moved out of the SO’s that I lived with for 12 years.
I like a home base-I have everything going to a P.O. Box and I can leave the cabin alone for as long as I need.

 

[Bamaman]

And when I see numbers like the house prices in California, I cringe. I'm so fortunate to have been born and lived in LCOL places which allowed me ER @ 58 years old.

For the price of many California homes (many of which are not up to my standards), I could be in a 8,000 to 10,000 home with a large lake and boat at my front door--with property taxes under $5K.

But home is home no matter where it is. I could also handle living in South Lake Tahoe, Nevada--one of our favorite vacation spots for many years. Nice homes in the Bay Area and Southern California are just priced out of sight for what you get. I guess that's one reason thousands are in an exodus from the state.