A LEASEBACK TRANSACTION

Many senior citizens have grown "house rich and cash poor." As the cost of living and medical care rises, their finances are often stretched to the limit and sometimes beyond. Obviously, you can't convert a house into cash by hauling a door to the grocery store or some carpeting to the doctor's office. However, there are ways in which the equity in a home can be converted into spendable cash.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.

A "leaseback" transaction is one such device that, in the right circumstances, can help convert your home equity into cash. The cash can then be used to pay expenses. The technique is not without its pitfalls, however, and any leaseback transaction should be entered into only after consultation with an experienced real estate lawyer and after careful consideration of the transaction.

Leaseback transactions are fairly common in the business world. They are far less common among individuals dealing with personal use assets such as their home. In either case, the structure is the same.

A leaseback is a two step transaction. In the first step, you sell your home to a third party. In the second step, you enter into a lease agreement to rent the same house for a fixed period, typically life. Effectively you go from being an owner to being a renter without moving.

The investor in the home may be a third, unrelated party or it may be a relative. You should note that if the buyer/landlord is a relative, various tax considerations may become more important when the deal is structured. The price that is paid may have to be less than the value of your home in order to induce the buyer/landlord to give you a lifetime lease at a favorable rent. The sale of your home will trigger the recognition for income tax purposes of any gain you have in the house. The tax law may permit you to exclude up to $250,000 of the gain on the sale. The buyer might borrow the purchase price and pay you cash or you may elect to finance the transaction by accepting installment payments.

The object of a leaseback transaction is to replace your home with cash that you can spend to offset various expenses. After the transaction, the buyer/landlord is typically responsible for the maintenance, insurance and property taxes on the home.

There are, however, some disadvantages. First, finding a buyer willing to enter into such a transaction under terms that are appropriate may be difficult. Second, converting your home to cash converts an asset which is exempt from Medicaid consideration into an asset that might have to be "spent down" to qualify for Medicaid. Also, as a tenant you will be at the mercy, to a large extent, of a landlord who may turn out to be less than desirable. Your lease will give you some protection, but suing to enforce the lease might be both expensive and time consuming. The transaction will also be more expensive in terms of legal and, perhaps, some other fees than would a typical home sale contract. Finally, the possibility that you might outlive the proceeds of the sale must be considered.