Financial and Legal Considerations: Mortgages, Pensions and Taxes
Financing, tax and the documents that matter
Mortgages. Retirees often qualify on Social Security, pension, annuity and IRA withdrawals, or through asset-depletion underwriting. A reverse mortgage (HECM) requires the youngest borrower to be 62 or older and the home to be the principal residence with existing liens paid off; the borrower keeps title, must pay taxes, insurance and upkeep, and may take a lump sum, a line of credit or monthly payments. HECM for Purchase lets a 62+ buyer purchase and finance in one transaction.
Tax. Section 121 excludes up to $250,000 of gain ($500,000 married filing jointly) on a principal residence owned and used two of the last five years. Assets held until death generally receive a step-up in basis, which often beats a lifetime sale. Required minimum distributions begin at age 73 under current law. Property tax relief - homestead exemptions, senior freezes, deferrals - is state and local, so verify rather than assume.
Legal. Power of attorney, trusts, beneficiary designations, and the five-year Medicaid look-back on gifts. Adding a child to title is rarely the clean solution clients expect.
Traps: believing the bank takes the home under a reverse mortgage; confusing step-up in basis with the capital gains exclusion; quoting the old 70½ RMD age; assuming Social Security is never taxable; assuming a surviving spouse keeps both benefits.
Worked example. A couple sells after 30 years with a $600,000 gain. The joint exclusion is $500,000, leaving $100,000 taxable (plus any depreciation recapture). Holding until death would have stepped up the basis - a conversation worth having before the listing appointment.