Ask The CFP® Practitioner
“I long, as does every human being, to be at home wherever I find myself.” — Maya Angelou, author, 1928-2014.
Question: Many of my friends are selling their homes and downsizing or renting. What are your thoughts about this trend?
Answer: Your question hits home (pun intended)! Last month, three family members took part in real estate transactions. Not knowing your age, my response will reference these personal examples to illustrate what’s happening as housing requirements have changed for different generations in our family. There is no right or wrong answer as to whether renting or owning is best; the correct choice is what’s appropriate for you.
Lifestyle and Economics
A recently retired couple sold the house in New England that they called home for the past 30 years. The long, cold and snowy winters grew tiresome when compared to carefree travel and time with grandkids out West. Yes, selling the old homestead was emotional, and shedding three decade’s worth of possessions wasn’t easy, but the benefits greatly outweighed any inconvenience.
Now, living in a sunny part of the country near kids and grandkids, life is good for these boomers. Selling and downsizing gave them the ability to pay cash for a new home and have money left over for discretionary retirement needs. This couple represents many retirees who are choosing to make the transition to more manageable housing alternatives near family members.
Economics and Location
The second example addresses a young, growing family choosing to live in a more desirable school district. This couple purchased their first home before the kids were born. Now, with new priorities and the opportunity to tap into the significant equity they’d accumulated, they decided to make the move. Unleashing and redeploying the equity allowed them to shorten the term of the new mortgage and add funds to their retirement and college funds. Favorable economics made this a win-win; the kids will attend the best possible schools while Mom and Dad improve their financial well-being.
Economics and Lifestyle
Finally, the third family sold an older high-maintenance home with a beautiful yard in exchange for a bright and new, low maintenance apartment. With Mom going back to school, it made perfect sense to trade the demands and inevitable costs of a vintage home for a simpler lifestyle. Now, they won’t have to forfeit studying or family time, for yard work or fixer-upper projects.
Depending on your situation, there may be two additional considerations under the economic category. The first is liquidity. It’s human nature to have selective recall, minimizing or forgetting painful events like the recent housing crisis. More often than not, real estate is an illiquid asset. If there’s a chance you’ll need to access funds tied up in your home, its good practice to evaluate cash flow. Second, if you’re fortunate enough to have any significant price appreciation on a home you intend to sell, there may be tax ramifications. Capital gains tax may be due if the gain is greater than $250,000 for a single filer or $500,000 for married taxpayers. In addition, proceeds over that amount may be subject to the Affordable Care Act Medicare Tax of 3.8 percent if you’re a “high income” taxpayer (defined as $200,000 or more in reportable income if single and $250,000 married filing jointly). Be sure to consult with your tax professional for information on these issues and more.*
Homeownership rates across the country are decreasing as our lives changes. It’s interesting to note that economically strong countries like Switzerland, New Zealand and Germany have the lowest homeownership rates. The Organization for Economic Cooperation and Development (OECD) reports that only 38 to 41 percent of the population in these countries owns their homes. In contrast, the U.S. Census (see chart) reports that U.S. homeownership rates fell below 65 percent from a peak of 69.2 percent in 2004. Several explanations for this include increased down-payment requirements, stringent mortgage requirements, decreased disposable income levels, health issues and an aging population; whatever the reasons, the trend is obvious.
Most Americans still believe that homeownership is the path to wealth and security. As with so many things, there are no absolutes. Not everyone should own a home; there are many reasons why renting and/or downsizing are advantageous. A realistic and thorough inventory of your circumstances will steer you towards the right decision for you and your family. Stay focused and invest accordingly.
*As federal and state tax rules are subject to frequent changes, you should consult with a qualified tax advisor prior to making any investment decision. Information obtained from outside sources is believed to be accurate. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or solicitation to buy or sell any particular investment. Opinions expressed herein are those of the author and subject to change at any time, and not necessarily those of Raymond James & Associates. Raymond James does not provide advice on mortgage issues.
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This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, email [email protected] Website: www.raymondjames.com/InvestmentInsights