If you’re feeling house rich and cash poor, you are not alone.
The recent run-up in home prices has made many long-time homeowners richer than they ever thought they would be. But it’s not all limos and caviar -- the money is tied up in a house you live in, and can’t trade on the open market.
In fact, all that home equity can cause problems: Cash-strapped localities are raising property assessments to keep up with home values, and your property taxes could well rise.
And, hard as it is to believe, you might also find yourself topping the $250,000 gains ($500,000 for couples) that Uncle Sam lets you keep tax-free when you sell the house.
Here are some suggestions for making the most of that funny house money.
Keep records
Make sure you’re keeping meticulous records of the cash you put into your home, because when you sell it you can subtract many of those expenses from your final gain. You might need them. This doesn’t include things like the pansies you planted in the garden this spring or the new paint job in the family room. But it does include the roof replacement and the new kitchen cabinets.
Monitor property taxes
If your valuation goes up, make sure the increase is in line with other property in your community. This information is generally public knowledge and may be available online.
If you feel your property is overvalued by the taxman --appeal. You may not win, but it can’t hurt. Many states and municipalities offer older -- usually retirement age --homeowners some break on their property taxes; check to see if you qualify by age.
Line up a home equity line
Rates have gone up and will probably go up some more, but there are few deals better than the convenience of a loan where you can write checks for yourself ... and deduct the interest.
There is competition in the home equity line market now, so hold out for one that has no closing costs. And before you sign, make sure it’s a traditional home equity line that actually gives you the checkbook. Some lenders, like Quicken Loans, require home equity line borrowers to request each draw individually and then wait for the lender to issue a check.
Use your home equity line for home improvements, to pay for a car that’s a good deal, or to consolidate high-rate debt if you know you’ll pay it off. Don’t use it to splurge on consumable items that won’t last as long as the first year’s interest payments.
Be creative
Use your home creatively to add money to your bottom line. If you live in a vacation area or near a university or city that hosts a major golf tournament or other athletic event, you can rent out your home for as many as 14 nights a year and pocket the income, without paying any taxes on it. You could also arrange to swap houses with a family that lives where you want to vacation, and end up with free lodgings.
You can run a small, side business from your home and start writing off some of those expenses.
Some complex tactics
Older homeowners who don’t want to move can use even more complex tactics. Reverse mortgages, which used to be expensive, complicated, and mainly reserved for sickly people in their 80s, are now a better deal, thanks to new federal rules, increased competition, and lower interest rates. If you already have a reverse mortgage, you can refinance it.
Older homeowners who want to stay in their houses forever, can also use a technique called a private annuity, suggests Seth Pearson, a financial planner in Dennis, Massachusetts. In this arrangement, the homeowners give the house to their children in return for the children providing them monetary support for the rest of their lives. The children hold the house in a trust. The retirees get current income and the ability to stay in their houses. When they die, their children get the house. This avoids capital gains taxes, and keeps more of the house-related income all in the family.