Apr 05 2008
Reverse Mortgages California: Spending Your Savings, Part 2
This is the second post in a series.
If you need additional monthly cash flow, and there is any possibility that your funds will last less than a year, then it is time to assess all your options and obtain the money that you will need over the next several years. Which may mean that it is time to obtain a reverse mortgage. You do not want to get caught in a stressful last minute scramble for money and risk not having enough.
If you are going to use the funds that you have, make sure that you first consider the cost as compared to a reverse mortgage. If those funds have been in invested in stocks or a similar investment vehicle, you will probably owe capital gains taxes when you cash them out. The tax laws have become so complicated that you should talk to your tax expert to determine how much in taxes you will owe. Another cost of cashing in your investments is the loss of the future returns on those investments. Remember, the long-term return on stocks is about 11% per year – which, when compounded over time, can add up to a lot of lost money – far more than a reverse mortgage would cost you.
What if you are an heir and those investments belong to a senior parent? Then you need to consider the consequences of using those funds now versus avoiding capital gains taxes by waiting to inherit the funds. How does that work? Generally, when you inherit an asset that has increased in value, you enjoy the benefit of a stepped-up basis in that asset and thus no capital gain. Here’s an example:
Mom bought stock 20 years ago for $1000. $1000 is her basis in that stock. Today, that is worth $10,000. If she were to sell it, she would have a capital gain of $9000. That means she must pay capital gains taxes on $9000. But, when the heir inherits the $10,000 in stock, his basis is $10,000. So assuming he sells it before it appreciates more, he will have $0 in capital gains taxes! You should consult a tax expert to confirm all tax-related issues for your specific circumstances.
Check here to find out what reverse mortgages California cost.
