FROM HERE TO RETIREMENT AND BACK
Everybody’s Uncle,
My husband’s job was transferred and we are relocating from MA to OH. We sold our primary residence for $400.000. We are planning to rent an apartment in OH, retire in five years, return to MA and purchase a new residence. We could buy new home sooner if the housing market goes down. I am considering putting all $400.000 in four 1-year CD’s for 5.5%. Should I be concerned that only $100,000 is FDIC insured? Is it safe to open a high rate Certificate of Deposit online? Any other suggestions on investment?
[Unsigned]
Unsigned,
Sale of a $400,000 qualifying primary residence usually has no tax consequence. If that is true, the next consideration is risk tolerance. Your mention of bank certificates of deposit indicates low risk tolerance. If you have questions about FDIC coverage, either use different banks or ask a bank officer to be sure each account is fully covered. You have a 5 year window but are drawn to the 1 year rate because it is higher – NOW. You could stagger maturities, 6 months, 12 months, 18 months, 24 months to balance interest changes with minimal oversight. Be sure that all certificates mature when you need the money to buy your next home.
The real risk is the change in home values. If values were to increase in the next 5 years as much as the last 5, you might have to settle for a lot less home upon return. On the other hand, if the real estate market falls you could be buying a larger home or better location. I have no crystal ball but you have to be aware of these possibilities.
As long as your deposit is FDIC insured, on-line or on-the-block seem okay. Due diligence is required in any case.
There are an infinite number of other possibilities. You could buy a home in Ohio and remain in the real estate market. (This would be my preference.) The interest you get on the CD’s will be taxable; the long term capital gain on qualifying residential property has an exclusion of $500,000 for a married couple. (If you purchase a home for $400,000 and sell it in five years for $600,000, under the current rules the $200,000 gain would not be taxable. Also, your purchase when you return starts a new cost basis upon which the $500,000 exclusion is based. In other words, if you bought your present home for $200,000 you enjoyed a $200,000 tax free capital gain. If you buy a $400,000 residence now and sell it in 5 years for $600,000 you enjoy another $200,000 tax free sale. If you return and buy a $600,000 home you would be tax free up to $1,100,000. If you stayed in your $200,000 home and sold it for $1,100,000; $400,000 would be taxable.) If the real estate market goes up or down comparable homes should rise and fall about the same amount. Some locations appreciate some depreciate. Again, due diligence is a must.
Nothing herein should be considered as advice. All options have some type of risk. I hope I got you thinking.
Everybody’s Uncle
