Ann Wolfe is a millionaire. But she doesn’t live like one.  

That’s because nearly all her wealth is tied up in her house. 

Wolfe’s house in Seattle’s Ravenna neighborhood has been on a tear. The four-bedroom 1926 charmer on a leafy street is worth $1.2 million, according to Zillow. 

This isn’t just a Seattle thing. Over the past two years, Americans who own their homes have gained more than $6 trillion in housing wealth, according to the Federal Reserve. Which is to say, Wolfe has a lot of company, especially among retirees who have had more time to build equity. 

Wolfe started teaching in Seattle Public Schools in 1966. Throughout life’s adventures — marriage, divorce, going back to school to retrain as a family therapist, adopting a child and raising him as a single mom — Wolfe found she had enough money to live on, but not enough to invest.  

“I’ve always felt a little on the edge financially,” she says. 

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Now 78, Wolfe would like to splash out a bit, travel and donate to charities. She wants to give money to her son and grandchild. 

“It would be nice if you could share the equity while you are still alive,” she says. 

But, as Wolfe is discovering, having equity in real estate is not the same as having cash parked in a checking account. The wealth is embedded in the roof over her head and the hardwood floors under her feet. Wolfe had an idea. 

“If I built a DADU in my backyard I could live in it and collect rent for my main house,” Wolfe says. She hired an architect to draw up plans for the detached accessory dwelling unit, basically a small house in her yard. She also hired a contractor. Then $18,000 into the project, she thought she’d better talk to a financial planner before she took on $250,000 in construction debt. 

For years, Wolfe has read the Money Makeover column and she reached out to The Seattle Times for some free help. Our partner, the Financial Planning Association of Puget Sound, found a planner to work with her. Steve Burkett is a certified financial planner with Palisade Investments in Bothell.

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Right away, Burkett was not keen on the DADU plan for Wolfe. 

“She’s 78 and she’d spend a quarter of a million dollars on the new house,” Burkett says. “When would the payout come? Would it be in her lifetime? She doesn’t have a lot of runway.” 

Burkett and Wolfe sat down to take a big-picture look at her finances starting with income. She has a pension of $1,484 a month from her years as a teacher. Her Social Security check is $1,980 a month. So, she’s living on about half of the median household income in Washington state of $81,000 in 2020, according to the U.S. Census Bureau. 

In a perfect world, Burkett says, Wolfe would have a more diversified investment portfolio including equities. But years ago, Wolfe dipped her toe into a stock fund and pulled it right back out. 

“I didn’t like the way it was invested,” she says. “Philip Morris cigarettes. Oil. The prospectus tells you all that. I cashed it out.” 

Wolfe has $10,000 in a money market fund and $27,000 in an IRA. Wolfe recently inherited $70,000 when her sister died. 

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“I have more cushion than I’ve ever had,” Wolfe says. “But I’d rather have my sister.” 

Her house is her biggest asset at $1.2 million and she also owns a small vacation house in Arizona that’s worth around $40,000. 

Wolfe’s house in Seattle accounts for most of her net worth. Burkett brainstormed different scenarios that could get the house to release some cash. He came up with three options for Wolfe and the thousands of equity-rich/cash-stretched seniors in her position.  

Option 1: Sell

Burkett believes more seniors should consider the big step of selling their house.

“I see this happening a lot,” he says. “The older parent is living a reduced lifestyle at the expense of keeping the real estate for their heirs. But what about you?”

Burkett tells Wolfe, “Selling the house would free up the unproductive wealth that’s currently trapped in your home. The major drawback is that there would be significant capital gains taxes due on the sale of your home.” 

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How significant? Wolfe bought the house in 1973 for $36,000. Using a $1.1 million figure that’s more conservative than Zillow’s Zestimate, Burkett ran the numbers and said Wolfe would have around $650,000 in capital gains, which would result in $147,000 in taxes. 

Option 2: Rent  

Wolfe could rent out her primary residence, rent a less expensive apartment and pocket the difference.  

“This option represents a nice middle ground,” Burkett says. “It would preserve a large inheritance by avoiding capital gains taxation associated with selling.” 

Burkett figures the rent/rent option would net Wolfe around $15,000 a year. The downside is that Wolfe would become a landlord at age 78. 

Option 3: Shelter in place 

The third option for Wolfe is for her to stay in her Seattle house. Though she would like to have more cash, Wolfe says she doesn’t feel pinched day to day. 

She has money to meet her expenses, to support her hobby of rowing on a masters team at the Pocock Rowing Center. “I’m not a big consumer,” Wolfe says. “I have a car and it works.” 

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Burkett points out that Wolfe doesn’t have a big cash pad. Case in point: she has spent $20,000 of her $70,000 inheritance on a new roof for her Arizona house. A major house or family emergency, a downturn in her health, could gobble up the rest.  

As a safeguard, Wolfe applied for a HELOC, a home equity line of credit.  

“That can serve as a cash lifeline, should she need it,” Burkett says.  

About her Money Makeover experience Wolfe says, “I thought Steve was so nice. He clarified a lot of things I have been trying to think about.” 

And she is still thinking. If you asked a Magic 8 Ball what option Wolfe will choose it might answer, “cannot predict now.” What she can say for certain is that the siren call of the DADU is still strong. 

“If I built the DADU I wouldn’t have to move. I like my neighbors,” Wolfe says. “I kind of do still hanker for that.” 

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Will the step-up in basis survive? 

Wolfe wants to share the equity in her home with her son while she is alive. Planner Burkett understands the impulse but warns it could mess up a tax provision that allows heirs to reduce their capital gains taxes. 

“If you die owning your home, under current rules your estate would get a step-up in basis,” Burkett said. 

It would work like this: Wolfe bought her house for $36,000 and now it’s worth about $1.1 million. If Wolfe sells, she’d pay a pretty painful tax bill on that appreciation. Alternatively, if Wolfe’s son inherited the home, the IRS would reset the value of the house at today’s market value. If he sold the house right away the son would not owe capital gains taxes. 

This favored tax treatment may not last. Last year, President Biden floated a proposal to tax unrealized capital gains. 

“It’s noteworthy that President Biden and some Democrats wanted to end the step-up in basis,” Burkett says. “It didn’t pass. However, we just don’t know the future of taxation for a nation whose debt grows daily.”