Frequently Asked Questions for
The Profitable Use of Every Dollar
of Your Real Estate Equity. It’s Not What You Sell It For, But What You
Get To Keep That Counts
“One good real estate investment is worth a
lifetime of labor.”
Throughout most of the country, substantial appreciation
has occurred with properties owned for 20-30 years or more. For most of
us, the value of our home or income property is critical to our
financial security. Clients over 55 are preparing to sell, retire,
and/or relocate. Most of them are realizing that their property’s equity
is needed to maintain their current lifestyle. Experience and training
over the years should lead us to become an expert in learning to
save every dollar possible for our
clients. In other words, it’s not what you sell it for but
what you get to KEEP that counts.
Experience has proven that proper planning for the
eventual sale of your personal residence or investment property, with
competent professionals, is absolutely critical. Why? Because you and
your family’s short and long term financial security is at risk.
In all too many instances, I
have witnessed people being
trapped into making bad, irreversible real estate and investment
decisions. Without the professional input of an experienced Seniors Real
a thoroughly prepared plan, and a top financial team, many seniors and
their families have lived to regret those snap decisions.
The purpose of this report is to trigger your thought
and planning processes.
The real estate problems and issues facing us, as
seniors, are very different from other property owners. A properly
planned real estate strategy can help provide you and your family with a
comfortable income for the rest of your life. Detailed discussions with
a Seniors Real Estate
CPA, and Attorney are critical to
your success in any real estate transaction. I must urge you to seek the
advice of all of these professionals before making any major decisions
about your property.
Most Frequently Asked Questions
Certain questions have come up repeatedly over the
course of numerous planning sessions with prospective senior sellers.
The following list summarizes the twelve most commonly asked questions
or concerns voiced over the years. These clients have owned both homes
and income property. In some instances, they have lived in one of the
income units. In those cases, they were able to treat the unit as their
home for real estate tax purposes. Please remember that adding a
“Seniors Specialist” REALTOR® along with a CPA, Attorney, and
Financial Planner to your support team can greatly relieve your stress.
We have used the “Question and Answer” format to simplify the
explanation of these considerations step by step.
1. I’ve already planned my retirement, so all I need
to do now is sell my property. Right?
Retirement planning is very different from the planning
required in selling your property. Many people have made economic plans
based on retiring at 60 or 65. We plan to live in our home until we
either sell our property or pass on. But sometimes circumstances change,
and our property must be sold in a relatively short period. Having a
pre-planned financial strategy for the sale of your property can make
all the difference in the tax ramifications you will face and the peace
of mind you deserve.
It’s important to analyze all of the important factors
discussed in this report to ensure that you are properly prepared. Even
though you may not be planning to sell now, making these preparations
will allow you and your family to rest comfortably. Clients who may have
to sell need to know exactly what to do to gain the best possible
economic outcome. Also, if something happens and you’re unable to
perform in the way you want, your property’s equity can still provide
for your security.
2. I’m going to have to pay taxes someday, so why
don’t I just get it over with now?
A certain percentage of clients feel like “Eventually
we’ll have to pay the piper, so why not do it now?” However, because
today’s senior can very easily live to 95 or older, seniors will
probably need every dollar of their equity. The money that you would pay
on Federal and perhaps your State government* (which is generally at 20%
to 30% of the profit/gain that is made on the sale) is money that you
need to keep and use to earn interest for as long as you can. Why?
Because most of us probably will never be able to earn this amount of
Recent studies have shown that we Americans live
longer and enjoy a more active life. We also have a greater need for
cash flow to maintain our lifestyle in the last quarter of our life.
Proper planning and tax considerations in the sale of your property are
critical even though your retirement situation may already be
established. Later on we’ll look at a couple of examples of how improper
tax planning, or lack of planning, can create horrendous tax
*With the 1997 Federal tax changes, it is very important that you talk
with your CPA, Tax Attorney, and REALTOR®
to determine your
current State capital gains tax requirements.
Most clients realize a substantial appreciation (capital
gains) on their property and, as responsible citizens, believe that they
should pay their fair share of any tax responsibility. The question is
when do you pay it? Most of us need the cash flow from the taxable gains
and are willing to let our estates worry about paying the taxes. In most
instances, that this is the approach to take. With proper planning, our
cash flow is stable, and we save on estate taxes as well.
3. If you specialize in tax-deferred sales, what do
This is a question asked over and over again. The first
step in properly answering this question is to analyze, in detail, the
acquisition of the property that you’re considering selling:
♦ When did you acquire
♦ How did
you acquire it?
♦ What are
the costs incurred to improve it?
♦ Do you
have written records of those expenditures?
♦ Is there
current financing on it?
♦ Do you
have it in a trust with a will?
♦ What’s the total value of your
The 1997 Tax Reform Act makes a combination of several
tax benefit programs available. All property owners are now allowed to
take the $250,000 (single) or $500,000 (married couples) exemption from
the sale of their
You must have lived there two of the last five years to qualify. This
means that at the time of sale any appreciation or profits up to these
amounts are yours to keep, invest, or spend for your future and NO taxes are due. If the gain on your property
is under the $250,000/$500,000 limits and you have other
secure places to invest your equity, then the most
prudent plan may be to take the tax-free cash proceeds and reinvest
4. We’ve owned a mountain resort property for years
and want to sell it, but the capital gains taxes are huge. What can you
There is a solution for your dilemma. The revised tax
law will allow you to move into your mountain home and claim it as your
primary residence for the next two years. Then you can sell it, and take
either $250,000 or $500,000 (depending on whether you’re single or
married) from the sale
tax-free. You must actually
live there, get your mail there, and prove in an audit (if required)
that this is your primary residence. If you own an income property, for
example, you can move into the largest unit in the building for two
years and use it as your primary residence. A substantial part of the
potential taxable profit could be turned into your home deduction and
treated as a tax-free sale. While this may be a short term
inconvenience, it could legally save you thousands. It is important to
consult with your Seniors Real Estate Specialist®, CPA, and the rest of
your financial team.
5. Why don’t I just refinance the property and live
off the money?
Refinancing any piece of property can provide a cash
flow and will allow you to have money to use. The difficulty of
refinancing and living off the cash flow is that once that cash flow is
gone, the property becomes a negative equity situation. Refinancing is
not a benefit to most people. There are reverse annuity mortgages that
allow you to borrow against your equity by creating a loan that is paid
out to you in monthly installments, or you could receive the cash all at
once. One problem seems to be that often there are very high costs
deducted from the loan right at the start.
6. Isn’t there a way that I could sell my property
and stay here until I’m ready to move?
Most people who ask this question are generally talking
about what’s called a Life
Estate. It’s a technique where
people can sell their property to someone else, creating a tax savings
situation in some instances, and still reserve the right to live in the
property for a specific period of time or until they die. However, with
property that has appreciated, it is difficult to find a buyer who will
go along with this for an unspecified length of time because generally
it’s not economically feasible. You also lose control of your property.
7. How does the 1997 federal tax exclusion work?
IRC. 121 allows any homeowner who
is selling his/her principal residence an excluded $250,000/$500,000
federal tax exemption from the gain on the sale ($250,000—single person,
$500,000—couple). This exclusion is a powerful program that has been
developed by the government, giving most of us - particularly seniors -
an opportunity to put all or most of the profits from the sale of our
primary residence into our pocket tax-free.
To qualify, you must have owned the property and used it as your
principal residence for two of the last five years. The effective date
of this exclusion was May 7, 1997 and all sales closed after this date,
are subject to the new laws.
8. There isn’t any more capital gains
Yes, there still is capital gains tax!
This question is often asked because of the ever
changing federal and state tax situations. Since the 1930’s, there has
always been capital gains and subsequent tax. How the amount is arrived
at, and at what rate of tax, has been subject to change. Capital gain is
the difference between the basis in your property and what you’ll sell
it for, less your selling expenses. The 1997 Federal Tax revisions set
the capital gains tax rate for most property owners at 20% of the gross
profit after expenses on property held for 12 months or longer. If this
is your personal residence, $250,000/$500,000 of gain is excluded from
tax if you occupied it for two of the last five years. Of course, on the
sale of your principal residence or income units, you do have to apply
the federal tax exclusions before calculating the amount of any capital
gains. If you have lived in income property over the years and treated
it as your home, it is very important to determine your original basis.
Why? Because the amount subject to capital gains is generally the amount
of profit between your original basis and the sales price of your
current property, less sales expenses and exemptions.
9. How can I get my equity to work for me and not
This is probably the most critical of all the questions.
Because of the appreciation of real estate over the last 20+ years, most
of us who have owned property since then (or even longer) have
substantial equity today.
Maximizing this equity (getting its highest and best use) and converting
it to a working asset for you is the exact reason for this report.
Clients have often said, “I own my
property free and clear, so it costs me almost nothing to live here.”
This isn’t true, and here is an example of how your equity can actually
work against you instead of for you: A property in Florida was acquired
for $50,000. It is free and clear and now worth $300,000. The property
taxes are $3,000 per year ($250 per month). The insurance, utilities,
etc. are somewhere in the area of $200 per month. On the surface, $450
per month is a pretty reasonable living expense, although you must add
in the ongoing maintenance and upkeep. However, to be totally accurate
you must add in the income producing value of your $300,000 equity at
some reasonable interest rates. The real cost to live in any free and
clear (unencumbered) property must include a reasonable rate of return
of the equity involved, plus the actual hard expenses (monthly out of
pocket and maintenance), which are always substantially higher than you
think. The answer, then, creates some new questions:
♦ Are you getting the
best economic and emotional return on your total equity in today’s
market, or do you need to re-evaluate and plan for tomorrow?
♦ Is the
“real” cost of living in the property a profitable use of equity? Or
could you live somewhere else more reasonably and use the extra cash for
♦ Would you
get a better value for those dollars by converting to another use?
♦ Do you
have enough cash flow to enjoy the balance of your life?
10. How can I be sure that I’m doing the right thing
and am using my equity to its optimum?
You might tell your clients that if they are over fifty
and their children were out of school, sell the family home. I realize
that this could be taken as a harsh statement, but as I have grown
older, I believe it to be absolutely true. What if they took their
equity and purchased a duplex, triplex or fourplex with an owner’s unit?
It could be in the same neighborhood that they’re living now or out in
the country, maybe even in a golf community. My point is that with this
kind of residential income property, your equity continues to work for
you and your family still has a place to call home. It is still
appreciating, generating a positive cash flow, and providing security in
your senior years. This is just one of many ideas to think about. It’s
never too late to start utilizing all your assets to create a positive
The purpose of the planning, discussion, and analysis
we’ve talked about in this Special Report are all brought to fruition
here. Only by taking the time to sit down with your Seniors Real Estate
Specialist®, CPA, and Attorney can you come to a proper, logical
decision of what is right for
While very few of us own million dollar properties and
these examples may not address the specific dollar value of your
specific property, the rationale remains the same.
Without proper planning and professional real estate
advice, mature clients are extraordinarily vulnerable at crisis
decision-making time. If you evaluate your individual situation in
advance of the time of sale, then whether you sell for cash or use some
form of creative financing, you will have the best situations and tools
available to minimize your liabilities.
All in all, with the proper planning, there are
tremendous tax and positive cash flow benefits available to all who were
smart enough to acquire property in the last twenty-five to fifty years.
You’ve gone through the traumas, the difficulties, and the sleepless
nights to make sure that your properties were cared for and paid for.
When the time comes to sell
your residence or income property, doesn’t it make good sense that you
analyze, evaluate, and seek a competent professional before you make any
decisions? Whether you’re going to sell in six months or six years,
having a plan makes it so much easier.
Information provided by the Senior Advantage Real Estate Council