What Is the Best Way to Use the Equity from My House to Pay for My Care?

My estate consists of a single-family home that is totally paid off, with a current value of $1 million. My adult children have no need for, nor do they want, an inheritance. I would like to get the best care possible if I become incapacitated. I know that the value of my home will provide for the care. The house is in my name only and selling it now would trigger a tax bill of 50 percent of the proceeds, so that seems like a stupid move. What is a smart way to make it possible for my children to tap into the equity to pay for my care? Once I am gone, they can inherit what’s left.

First, it isn’t likely that the tax bill for selling your home would eat up half the proceeds. The top capital gains tax rate is 20 percent and that is just a tax on the capital gain, not all of the proceeds. In addition, you can exclude the first $250,000 of gain. While there may also be a state tax on the sale, assuming that your basis in the house is zero – which is highly unlikely – the absolute most you would pay in federal taxes would be about $150,000, but it would probably be much less. You are right, though, because whatever this tax may be, there would be no tax if the house were not sold until your death since at that time it would receive a step-up in basis.

To access the equity in the house while you are alive, you can borrow on it through either a traditional line of equity or a reverse mortgage. An equity loan is less expensive, but depending on your income you may or may not qualify. In addition, there may be significant limits on how much you can borrow. A reverse mortgage may be more expensive, but will likely permit you to access more of the equity in the house, so it may be a good option in your situation. If your children or others have the resources to lend to you money, another option would be a private loan secured by a mortgage on the house. 

Don’t hesitate to call Scott Underwood. A trusted expert in the south with over 15 years Reverse Mortgage experience. I can be reached at (205) 908-2993 or (888) 220-0393 or scott@reversemortgagealabama.com. Offices in Birmingham, Huntsville, and Mobile, Alabama. Also covering the southern states such as Mississippi, Georgia, and Tennessee. Consider me your trusted local highly experienced resource.