Question What are some problems your clients have run into when trying to sell their homes and move into assisted-living (facilities)?

Answer: Often it is a “forced” sale, meaning they have not prepared to sell and the urgency may lead to a sale for less than could be realized otherwise. Many times the children are the ones who will need to step in and handle the transition and the sale of the home, and their own commitments and distance from Hawaii can create a less-than-desirable scenario for moving forward with marketing and selling. If the parent will be depending upon the proceeds of the sale of the home to fund assisted living, the delay in getting the home sold may place financial strain on the parent and the children.

Assisted-living facilities can be quite expensive. Depending upon the level of assistance needed, perhaps hiring some in-home caretakers or having a child move in to help can delay the need to sell and prove to be less expensive. In some cases, where other financial resources have been depleted and the state’s Medicaid program is needed, the sale of the home, which is considered an “exempt asset” for Medicaid eligibility, may result in a loss of family assets that could have been preserved by not selling.

Q: What advice do you have for homeowners looking to move to assisted living?

A: Prepare ahead of time. Those who implement trusts where appropriate, have properly drafted powers of attorney in place and engage in some level of Medicaid planning will have an easier time of it when decision time comes, and hopefully will realize more from the sale of their home.

The decision whether to sell upon entering the assisted-living center should not be automatic, but should be carefully considered, in consul­tation with the next generation and the accountant.

Q: What are options for homeowners when considering assisted living?

A: The option of obtaining in-home care should be looked at. If assisted living is the decision, the owners may want to look at keeping their home and renting it for income as an alternative. In certain limited circumstances, the use of a reverse mortgage may be useful to provide funds for in-home care.

I have had many clients move to mainland assisted-living centers on the basis that they can receive a greater level of services at a substantially lower monthly cost.

Q: What are some ways that homeowners can avoid having to pay high capital gains taxes if they do decide to sell their home?

A: Many seniors are familiar with the concept of “rolling over” the capital gain to a new home upon sale of a home. However, this is no longer the law. Under current tax law, homeowners who have occupied their home for two out of the last five years before sale are granted a $250,000 capital gain exclusion ($500,000 combined for married couples who file jointly).

This means that if capital gain upon sale of the home by a married couple does not exceed $500,000, and they have lived in the home for at least two of the prior five years, there will be no tax on the capital gain. This is likely the case for the high percentage of Hawaii’s homeowners.

The strategies for reducing the impact of the capital gains tax on the sale of the home when the exclusion is not sufficient or is unavailable is the same as for any other property owner who is seeking to sell.

An owner may sell the home on an installment plan, in essence providing some owner-financing to the buyer and spreading the capital gain tax over several years, and at the same time receiving monthly payments with interest from the buyer. An owner also may do some charitable planning and avoid some capital gains by creating a charitable trust.

Q: Can you reduce your capital gains tax by waiting until the death of your spouse or parents before selling a home?

A: When a person dies, the tax basis (purchase price plus improvements to the property) gets stepped up, or increased, to the fair-market value as of the person’s death. In essence, upon the death of an owner, the capital gains gets “wiped out.” If the person who inherits the property turns around and sells it for the date-of-death value, there will be no capital gain.

For a married couple, this stepped-up basis would apply only to the deceased spouse’s half, so that the capital gains tax would be cut in half if the surviving spouse sold the home immediately after the death of his or her spouse.

If the surviving spouse did not sell and allowed his or her children to inherit the home, there would be another step-up in basis that would effectively wipe out the capital gains for the children if they sold at the date-of-death value.

This is why the decision to sell upon entering an assisted-living center should not be automatic, but should be carefully considered in consultation with the next generation and an accountant.