To sell your house or keep it when it's retirement time: inflation says to keep it

Owning your housing when you retire reduces income taxes and puts inflation to work for you rather than against you. A specific example from a reader will detail the differences:

Reader A.'s house would sell for about $70,000. A mortgage of $14,000 remains outstanding, with interest at 5 1/2 percent. Income taxes of $3,700 were paid last year on total income of $37,000, which included $12,000 interest. The question is: Should Reader A. sell his house, invest the funds in certificates of deposit, and use the interest to pay rent for an apartment?

If the house is sold for $70,000, the net after expenses would likely be about $65,000. After paying off the mortgage loan, $51,000 would reman. No capital-gain tax would be payable if Reade A. elected to use his $100,000 exemption. At 14 percent return on the $51,000, interest income would be $595 a month. If this couple's marginal tax bracket is 32 percent, the after-tax income from the investment would be about $405 a month. This would be available to rent an apartment today.

On the other hand, if Reader A. continued to live in the house, mothly expenses would be the cost of mortgage loan payments (not specified) plus taxes, insurance, and maintenance. Interest on the mortgage loan would be deductible if the couple itemized. These payments would likely total less than rent for comparable space.

Inflation expectations could alter both sides of the equation. First, the cost of renting. With inflation at 12 percent, retals can be expected to double within six years. If the inflation rate moderates to 9 percent, a fair target for the next 12 months, rentals would double in eight years.An apartment that might cost $350 a month today with $55 left to spend elsewhere could cost $700 a month six to eight years in the future.

Increases in the cost of living in the house would be limited to rising taxes an disurance, plus maintenance. The big cost, payments on the loan, would remain constant, with interest at 5 1/2 percent a bargain rate. Further, if the house continued to appreciate at 10 percent annually, the selling price would be selling price would be $102,853.

Recognize that appreciation is not taxable annually. Further, the $100,000 exemption applicable to any capital gain on the sale when it occurs would avoid all or most of the tax on the appreciated value. Thus, inflation tends to work for you rather than against you, as in the case of taxable interest from CDs or other investments.

Continuing to live in one's house after retirement may not be possible or desirable for a number of reasons, including the physical inability to live alone or to negotiate one or two flights of stairs, inability to maintain the house at reasonable cost, adverse location, as in a high crime area, or the wish to relocate to a more pleasant climate. Any of these reasons may overshadow strictly financial trade-offs.

Another alternative should be investigated if a move is critical. Instead of selling, investing the proceeds, and rentng, consider rebuying a condominium or smaller house possible in a new area. Similar conditions relative to inflation would apply.