A couple is planning to tour the United States in a travel trailer during their first few years of retirement. They are going to sell their current home now and purchase another home when they finish their travels.
An interesting exercise is to determine the optimum time for selling the home: now or when they’re ready to buy their replacement home.
If they intend on traveling for more than three years, then it may be a good decision to sell prior to the sojourn to avoid paying taxes on the gain in their home. The IRS allows for a temporary rental of a principal residence while still keeping the $250,000/$500,000 capital gains exclusion intact. A homeowner must own and use a home for at least two of the five years prior to selling it. This means that it could be rented for up to three years, but it would need to be sold and closed before that three-year window expires.
Now or Later?
If the travel will be less than three years, there is an option of selling now or later. Using the example below, the homeowner sold the home, paid their expenses and invested the proceeds in a three-year certificate of deposit until the replacement home was purchased.
| Value of home at retirement | $500,000 |
| Unpaid loan balance | $200,000 |
| Sales cost estimated at 7.5% | $37,500 |
| Net proceeds | $262,500 |
| Future value at 2% for 3 years | $278,567 |
As an alternative, if the homeowner rented the home, not only would they have income, the home would continue to appreciate and the unpaid balance would go down resulting in larger net proceeds. Based on a 5 percent appreciation and continued amortization of the mortgage, the net proceeds could easily be $66,000 more.
| Future value at 5% appreciation in 3 years | $578,813 |
| Unpaid loan balance in 3 years | $190,000* |
| Sales cost estimated at 7.5% | $43,411 |
| Net proceeds in 3 years | $345,402 |
| Increased funds | $66,835 |
Obviously, there are a lot of considerations that affect the decision to sell now or later. But in an appreciating real estate environment, being without a home for several years could affect the financial position of the owner in the replacement property. It is certainly reasonable to look at various alternatives before making a decision. Call me at (760) 822-9510 to help you look at the different possibilities, and talk to your tax professional.
* Unpaid balance was calculated on a new, $200,000 loan at 4.5% amortized over 30 years. If this were an older loan, the principal decrease would have been greater.