Home, Sweet Pot of Gold

Is it time to lock in profits from your house?

Empty nesters rattling around in a big old house may find it's a tempting idea. Sell the family manse now -- even if you aren't ready to retire -- to lock in juicy profits before the housing bubble bursts. Then buy a smaller place or rent for a while until you decide when and where your next move will be. "This can be a great strategy for people who bought their home in, say, 1980 for $150,000 and can sell it for $700,000 today," says Robert Reby, a financial planner in Danbury, Conn.

Timing the housing market is no easier than calling the top of the stock market. If you sell now and your house goes up $50,000 more over the next six months, you may kick yourself for acting too quickly. If you decide to rent while you wait for housing prices to soften, you'll probably face stiffer mortgage rates when you return to the market.

Still, housing prices in many parts of the country are so high that pre-retirees ought to at least consider a sale. The biggest plus is that a capital gain of up to $500,000 on your primary residence is tax-free. (Halve the amount if you're single.) You can use the exemption as often as you like -- as long as you live in a house for at least two of the most recent five years. That means if you downsize to a condo -- even if it's just a few miles from where you live now -- you don't lose out if real estate prices continue to appreciate and you sell again when you finally do retire.

You're mostly likely to win if you live in an area where home prices have surged 40% to 60% or more over the past few years, as they have in parts of California, Florida, and the Northeast. Real estate in these areas is so overheated that a hike in mortgage rates of more than one percentage point could cause home prices to fall, says Mark Zandi, chief economist at Economy.com.

Since a home is more than a mere investment, lifestyle should be a major consideration. A year ago, Anne and Tim Mygatt, both 63, sold the four-bedroom colonial in Katonah, N.Y., they had owned for 28 years even though they had no plans to leave the area. "We needed to change our lifestyle," says Anne, who still sells real estate while her husband is a retired IBM executive. The couple opted to rent an airy waterfront house on Candelwood Lake in nearby Danbury, Conn.

Anne Mygatt admits another reason she sold is because she thought the real estate market was peaking. But even though her house, which she bought for $92,000 and sold for nearly $700,000, has since gained an additional $100,000 in value, she doesn't regret the decision because she and her husband wanted a change. Now, the two are buying back into the local market. Recently, they purchased a four-story luxury condo in Danbury for $455,000.

Buying works for the Mygatts because they plan to stay in the area. But if you think you may relocate in three years or less, it's better to rent. Depending on where you live, the broker's commission for selling your home can run 5% to 6%, and you'll pay a lawyer's fee and other closing costs.

Renting buys you time so you can figure out where you want to ultimately settle. "In the last years before retiring, couples often vacation in Florida, Arizona, and other resorts to see if they'd like to live there," says David Lifson, a New York accountant. "With your money sitting in the bank, you'll be able to move quickly if the perfect buying opportunity arises."

A home is probably your biggest asset. It's also your refuge. That's why your decision to sell now -- or later on -- must be based on practical as well as emotional issues. By thinking about all the implications before you take action, you'll avoid having any regrets.

By Susan Scherreik

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