Common Real Estate Slip-Ups Retirees Make
Since most retirees are not real estate professionals or statisticians, we thought it would be a good idea to uncover some of the mistakes often made by this age cohort, and offer a few insights which could serve to avoid common and costly mistakes.
According to Joe Sakalas, cofounder of Colorado Property Management, the most opportune time to purchase that second property is when a person is in their thirties or forties. For example, the second home can be rented out and be an income producer, or at least allow the owner to break even on his mortgage payments for many years. Additionally, buying a home today will certainly be cheaper than twenty or thirty years down the road. It is well known that in virtually every historical period, real estate values increase over a period of decades – often at a very sharp rate. So, buying before one is approaching retirement should save significant amounts of money, while building a portfolio. And when the golden years do arrive, the person will have the choice of moving into his second home, or selling it and using the equity to purchase an entirely different property.
Yet even if one cannot afford to buy at a younger age, it is nevertheless important to buy that second home as soon as it is affordable – and possibly move in several years before retirement. Because a retirement home is likely to be smaller than the one where parents raised their children, there are serious savings to be realized. Reduced energy bills are the most obvious example. And all things being equal, the taxes on the larger home are likely to be significantly higher, as are the home insurance premiums. In essence, the longer the move is delayed to a retirement home that better fits your needs, the more savings the you are missing out on.
Using retirement funds to pay off a mortgage is another mistake retirees often make. “This can be troublesome if people are using pretax money, such as IRAs, to pay a monthly mortgage bill,” says Pedro Silva, a financial advisor with Provo Financial Services in Shrewsbury, Massachusetts. “That means they pay tax on every dollar coming from these accounts, and use the net amount to pay the mortgage. This can be a significant percentage of someone’s monthly cash flow.”
A common miscalculation many folks make is their decision to deed the home they are living in to their children as a gift, before downsizing to a retirement property. But most analysts think that a wiser financial decision is to sell the property. Michael Hottman of Keller Williams in Richmond, Virginia points out that if retirees deed the home to their children, the kids could face an entirely unnecessary tax bill. This means that when the kids finally decide to sell the home, they would face a tax on the difference between the selling price in the current market and the basis (often the starting point in calculating capital gains) back when the parents bought the home decades earlier. And since the home’s value is likely to have appreciated significantly over those many years, the children would be faced with a very hefty tax bill.
According to Hottman, another good reason to avoid this path, is that the owners/parents could miss out on the $250,000.00 capital gains tax exclusion on the property ($500,000.00 if married). The savings on one’s federal taxes can be massive.
These are just a few of the decisions that retirees face – there are many others. The wise path is to consult with a seasoned real estate professional who can steer you through these complex issues.
Please feel free to contact me at Downing-Frye with your questions or for a complimentary consultation if you are considering a retirement property.