10 Things to Do After You Sell Your House
Selling real estate is generally stressful. After the ink has dried on the deed and you’ve dropped your house keys into the hands of the new owners, the thought of refocusing on your job and other life responsibilities may seem like a tropical vacation. The last thing you want to do is worry about another real estate-related to-do list.
Here’s a carrot to keep you reading: The ten items in this list can save you big money and preserve your peace of mind. So, if you’re looking for an incentive to get you through some of these loose-end-tying tasks, think about more cash and lowered blood pressure.
Keep Copies of the Closing and Settlement Papers
At the closing for your property’s sale, you’re going to be buried in an avalanche of paperwork and/or electronic documents. After you dig yourself out, you may just want to run away from it all. Avoid this temptation! You should keep copies of all those documents for the good ol’ IRS.
Next time you file your taxes, you may need documentation for the expenses and proceeds of the sale. And even if you don’t have to file any additional forms with your tax return, hold onto this paperwork in case you’re ever audited.
Keep Proof of Improvements and Prior Purchases
Whether they help you or hurt you, tax laws all have one thing in common: They’re a headache. A perfect example is the law that allows you to add the cost of improvements to your home’s cost basis during your years of ownership — a potentially nice tax break, if you have a sizable capital gain.
The problem is, to be able to take advantage of this tax break, you need to keep documentation for every dollar you spend on home improvements. (Note: You can claim the tax break without every last dollar spent documented.) And, for as long as you’re a homeowner (which can be decades) and continue to defer paying tax on your profits, you have to hang onto these documents. As if you don’t already have enough clutter in your life!
Saving all these receipts can seem like an exercise in futility. If you’re never audited, your receipts may never see the light of day. In fact, if your house-sale profits fall under the exclusion limits (which is the case for the vast majority of house sellers), your adjusted cost basis for tax purposes is a moot point. But the point of keeping documentation for tax purposes is to anticipate the unexpected; think of it as insurance. Someday you may sell your house and owe tax on your profits. And, because you never know when one of those dreaded IRS audit letters will land in your mailbox, keep those receipts!
Another reason for keeping receipts for improvements is to document the excellent condition of your house to prospective buyers. If you claim that the roof is only five years old, having the receipt from the roofing company will prevent the buyer from doubting your veracity.
Stash Your Cash in a Good Money Market Fund
If you sell your house and don’t immediately buy another one, you need to find a safe place to park your proceeds. You don’t want to put that money somewhere volatile, such as the stock market, where a market crash on any given day, week, month, or year can delay the purchase of your new home for a long, long time. On the other hand, you also don’t want tens of thousands of dollars languishing in a low- or no-interest checking or savings account.
Money market mutual funds offer you the best of both worlds — safety and reasonable rates of return. Although money market funds aren’t insured by the Federal Deposit Insurance Corporation (FDIC), they are considered just as safe as bank accounts. Only one money market fund has ever lost retail shareholder principal in the history of the fund business, and the amount lost was less than 1 percent. There have been hundreds of bank failures over the decades where depositors have lost money in excess of the insured FDIC limits on those accounts.
Like bank savings accounts, but unlike certificates of deposit (CDs), money market funds offer daily access to your money without penalty. Most money market funds also offer free check-writing privileges, usually with the stipulation that the checks are for at least $250 or $500.
Among the major mutual fund companies with good money market funds, consider Vanguard (800-662-7447), Fidelity (800-544-8888), T. Rowe Price Summit (800-638-5660), and USAA (800-531-8181). If you’re in a high tax bracket, consider a tax-free money market fund that may end up netting you a higher effective return than a taxable money market fund on whose dividends you must pay federal and state income taxes. For more details on money market and other types of mutual funds, pick up a copy of the latest edition of Mutual Funds For Dummies by Eric Tyson (Wiley).
Double-Check the Tax Rules for Excluding Tax on House Sale Profits
A tax law passed in 1997 enables you to exclude from taxation a significant portion of the profits from the sale of your primary residence. Congress can’t ever seem to leave things alone, though, so keep your eyes and ears open for possible changes to the real estate tax laws. If you base important decisions on outdated rules, you risk losing loads of money.
Cast a Broad Net When You Consider Your Next Home
Selling your house and buying another takes a great deal of your time and money. The more often you move, the more these costs compound. So when you choose your next home, choose carefully.
Before setting your mind on living in one specific area or type of property, check out a variety of different areas and housing options that address your needs. As a variation of the famous Socrates quote, “The unexamined life is not worth living,” we say, “You’ll probably be less happy in your next home and want to move soon if you haven’t explored alternatives before buying.”
Remember That Renting Can Be a Fine Strategy
Don’t feel pressured to rush into purchasing your next home, especially if you’re having doubts about the location and the type of home you want. Renting isn’t “throwing money away,” especially in the short term. Buying a home you soon have to sell because it doesn’t meet your needs or wants is throwing money away — the transaction costs of buying and selling real estate can dwarf the short-term costs of renting.
If you’re unsure about where you want to buy, try renting in the area you love most. If the neighborhood turns out to be everything you dreamed (or at least good enough), then you’re in position to move quicker when homes in that area become available. On the other hand, if you find that the neighborhood has too many warts, you can pat yourself on the back for not rushing into a purchase and use the rental as a base for investigating other options.
If you do rent after selling your house — because you no longer have those tax-deductible mortgage interest and property tax payments — be sure to increase your income tax withholding or estimated quarterly payments. Your employer’s benefit department can provide you with Form W-4 for adjusting your withholding. If you’re self-employed, adjust your quarterly tax payments using the “Estimated Tax Worksheet” that comes with Form 1040-ES.
Reevaluate Your Personal Finances When Things Change
While you’re waiting to purchase another home, your situation can change, of course. Perhaps you get a big promotion at work or inherit money. Or maybe you have twins instead of one baby, and your expenses increase while your income decreases.
No matter the change, be sure to revisit your ability to make future housing payments and accomplish your other financial and personal goals before signing any real estate contracts. When you do buy another home, be sure to adjust your income tax payments by using the forms we mention in the preceding section.
Don’t Simply Rehire Your Listing Agent When You Repurchase
The agent who just sold your house may have done a terrific job. And you may be tempted to simplify the selection process for finding an agent for your repurchase by asking that same agent to help you with buying.
You’re possibly making a mistake if you rehire the listing agent when you repurchase. Here’s why:
- Buying and selling require different skills. While some agents are comfortable working “both sides of the street,” others prefer to specialize as either a buyers’ or sellers’ agent.
- Moving from one geographic area to another requires knowledge of two local real estate markets that may have quite different issues and property values.
- Different agents specialize in different price ranges and types of properties, and you’re probably not moving to a property of the same type and in the same price range.
If you believe that your listing agent also has the skills needed to be a good buying agent and you’re moving within the community into a similar type of property, then interview that agent as one of the three agents you’re considering hiring. Make clear to the agent who sold your house that, although you appreciate his efforts for you as a seller, the agent who best meets your needs as a buyer is a separate issue.
Another issue to consider: Some agents will discount their commission for clients with whom they do repeat business. The agent who sold your house may be willing to do so.
Think Through Your Next Down Payment
After you sell your house, you may well have some choices about the size of the down payment on your next home purchase. At a minimum, we recommend you make a down payment of at least 20 percent of the purchase price of your next home. Why? Because that’s the percentage that generally qualifies you for the best mortgage programs available and avoids costly mortgage insurance.
What if you can make more than a 20 percent down payment? In that case, the real question is whether you can earn a high enough return investing that extra money in mutual funds, stocks, bonds, and so on to beat the cost of borrowing money on your mortgage.
Suppose you get a quote for a fixed-rate mortgage that charges 6 percent in annual interest. Ask yourself whether you can invest your extra cash and earn more than a 6 percent return (ignore the tax write-offs of mortgage interest because those are offset by the tax you’ll owe on your investment profits). Investing in bank accounts, money market funds, or quality bonds surely won’t do the trick. To have the potential to earn a return that high, you must consider growth-oriented and riskier investments, such as stocks, investment real estate, or small-business investments.
Younger homebuyers willing to take on more investment risk should lean toward a 20 percent down payment. Older homebuyers who tend to invest less aggressively should opt for larger down payments.
Remember to Send Change of Address Notices
Although you may want those to whom you owe money to think you’ve fallen off the face of the earth, you don’t want to rack up late payment fees, interest charges, and damage your credit report because your bills can’t find you. Don’t forget to change your address with the following folks:
- Billing companies (credit and charge cards, cellphones, loans, and so on)
- Investment accounts
- Places of employment
- Family and friends
Don’t delay informing all parties you know of your change of address! Visit or call your local post office and request a Mover’s Guide, which includes a permanent Change of Address Order Card (or do everything online). The Postal Service recommends that you complete and mail your Change of Address Order Card or Internet form 30 days before you move to ensure timely forwarding of mail after the date of the move.