For 32 years, he filled in the tire tracks you made when you drifted off the concrete backing down your hilly driveway. Now he’s gone, and the divets gape, black and muddy. It is time to move out?
In our series on how to manage finances after the death of a spouse, we’re exploring tips from FINRA, a reliable financial source. Today, Tip 9: Your Home.
Avoid Big Changes
When I get upset, my normally clear patterns of thinking blur – kind of like my eyes do when there are tears in them. When that happens, it is hard to see clearly and to think straight, so decisions made during that time may not be the right ones.
When you lose your spouse, everything gets turned upside down. Instead of a normal, comforting routine doing the same things with the same people, you tend to have an influx of friends and relatives around. You aren’t sleeping at the same times, eating the same foods, or doing the same stuff. An adult child, sister, or best friend may be a rock of support, and the sense that you should think about living near or with the person may become very strong.
It could well be that the best thing for you to do is to sell your home, end your lease, and move toward that person of support or that location you’ve always dreamed of living in. However, if that really is the right thing to do, it’s still going to be as right of a thing a year from now as it is today.
Hold off on big decisions soon after you’ve lost your spouse.
If You Rent
If you are renting a place and you lose your spouse, you may be able to terminate the lease without penalty, especially if you are over a certain age. Laws vary among states, and even if your state has no such law, you may have a special clause in the lease. Barring that, your landlord may be willing to work with you if the loss of your spouse will make it difficult for you to afford your rent. As discussed above, making a permanent change quickly may not be the right thing to do, so if you can afford the rent, it may make you happier in the long run if you stay put short term.
If You Own
Deciding to sell a home you own is an even bigger decision than ending a rental situation, so you want to go even more slowly there. Luckily, the process of selling home inherently slows you down since the home has to be readied for sale, listed, an offer made, and a closing arranged and completed.
Even with those innate impediments, a person can still move too fast, especially if a relative is interested in buying the home from you or if you live in an area that is a seller’s market and homes are flying off the shelves. In both cases, you want to make sure to put on the brakes because once that home is gone, you are probably not going to be able to afford get it back, and the tax and other financial consequences can be substantial.
Taxes If You Sell Your Home
Home sales that are profitable can cause taxable income, or, in other words, if you sell your home and make a profit on the sale, the profit is added to your taxable income. True, it’s taxed at a different rate because it is considered a “capital gain” rather than “income,” but it still can add to the total amount upon which you have to pay tax.
However, homeowners get a special break on profits from the sale of their personal residence if they meet IRS-defined eligibility requirements. These requirements include, among others, having owned in the house for at least 24 months out of the last 5 years leading up to the date of sale and having lived there for at least 24 months of the previous 5 years (very simplified here; see IRS Pub. 523 for more info).
As a widow, you have an additional possible break with regard to the home ownership part of eligibility if you meet certain other guidelines including selling the home within 2 years of your spouse’s death and not having remarried.
Selling Your Home at a Loss
An unfair aspect of the home sale of a personal residence is that you can’t write off (deduct) that loss in the same way you can deduct a loss for a stock that failed to make you a profit. Here’s a simplified example (in a real tax return, other factors would play in!): if you buy a stock for $10,000 in 2019 and it loses value and you sell it for $2,000 in 2020, you have a loss of $8,000 that you can use to reduce your taxable income. You can only use $3,000 of that $8,000 loss each year, but you can carry the loss over to future tax years to help reduce your future taxes. You are allowed to subtract the first $3,000 off your total income in your 2020 tax return, the next $3,000 on the 2021 tax return, and the last $2,000 on the 2020 tax return. It’s sad that you lost $8,000, but at least it helps a bit on your tax bill.
If you bought your house for $158,000 and you sell it for $150,000, you would also have an $8,000 loss. However, you can’t use that loss to reduce your tax bill. Not fair! But it’s the law.
You can arm yourself with more information via the U.S. Securities and Exchange site on senior finance. We’ll continue to cover FINRA’s tips for widows in the next few articles. Tip 10 talks about avoiding fraud at this vulnerable time. Thank you for joining me.
Kathryn Hauer, a Certified Financial Planner ™, adjunct professor, and financial literacy educator has written numerous articles and several books including the “11-Step, DIY, Comprehensive Financial Plan Workbook” and “Financial Advice for Blue Collar America.” She works to help clients and readers understand and act on complex financial information to keep them and their money safe. She functions as a strong advocate and guiding light for her clients as they move through a murky and unfamiliar financial world. Learn more at her website.