CHICAGO – April 17, 2017 – One of the most stressful aspects of retirement can come down to real estate. Many retirees face several choices, like deciding whether to downsize, buy a second property, keep the family home or move to a senior community.
Realtor.com recently featured some of the biggest mistakes experts say retirees most often make with real estate matters, including:
Holding off too long on moving
If a retiree wants to purchase a second property, real estate pro Jon Sakalas, cofounder of 5280 Colorado Property Management, suggests the best time to do that is to purchase the property in their 30s or early-to-mid 40s because they'll reap more financial rewards that way.
The vacation home could be used as a rental property that can make them money – or at least allow them to break even – for possibly 20 years or more. When they're ready to retire, they don't even have to use the home they once intended as a retirement haven: They can sell that house and use the equity to buy a retirement home anywhere they want.
Tapping retirement funds to pay off a mortgage
Ideally, retirees should head into retirement mortgage debt-free. But accessing funds from a retirement account isn't usually the smartest way to do that.
"This can be troublesome if people are using pretax money, such as IRAs, to pay a monthly mortgage bill," says Pedro Silva, a financial adviser with Provo Financial Services in Shrewsbury, Mass. "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."
Deeding the property to children
Some retirees want to deed the family home to their children as a gift if they're downsizing into a new home. But they might be better off selling the property rather than deeding it to them.
If retirees deed children the property, they could face an unnecessary tax bill, warns Michael Hottman, associate broker with Keller Williams in Richmond, Va.
He points to several reasons why deeding may not be advantageous, but the big one: They could miss out on the $250,000 capital gains tax exclusion on the property ($500,000 for a married couple) and the kids could inherit the "basis," or original price, which is then used as the starting point to calculate capital gains. When the kids one day decide to sell the home, they could face a tax on the difference between the current home's value and its basis back when Mom and Dad bought it many years earlier.
If the property did appreciate over that time, the kids could be looking at a pricey tax bill.
In all cases, retirees should consult a tax specialist to help them decide the best option in their specific case.
Source: "5 Major Mistakes That Retirees Make with Real Estate," realtor.com (April 13, 2017)
© Copyright 2017 INFORMATION, INC. Bethesda, MD (301) 215-4688