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.

Most Frequently Asked Questions

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 money again.

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 you suggest?

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 it?
♦ 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 estate?

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 personal residence tax-free. 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 them.

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 suggest?

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?

Currently, 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 tax, right?
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 against me?

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 other needs?
♦ 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 cash flow.

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 you.

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.