Sell­ing the house can be a vi­able re­tire­ment strat­egy, but only in cer­tain cir­cum­stances.

Investment Executive - - CONTENTS - BY DWARK A LAKHAN

clients seek­ing to ac­cess the value held in their homes dur­ing re­tire­ment of­ten are faced with a dif­fi­cult choice: should they sell and down­size, or sell and rent?

“It’s a de­ci­sion they have to think about in­tel­li­gently,” says Prem Ma­lik, fi­nan­cial ad­vi­sor and char­tered pro­fes­sional ac­coun­tant with Queens­bury Se­cu­ri­ties Inc. in Toronto. “Al­though down­siz­ing to a smaller house can be a vi­able choice, it works well only if clients move to a lo­ca­tion where houses are much cheaper.”

An­other fac­tor i n suc­cess­ful down­siz­ing: there must be a big gap be­tween the price of a client’s house and the one he or she is plan­ning to buy, says Ai­man Dally, char­tered pro­fes­sional ac­coun­tant and pres­i­dent of Copia Fi­nan­cial So­lu­tions Inc. in Oakville, Ont.

“If a client is down­siz­ing from a $500,000 home to one that costs around $400,000, that might not make sense,” he says, “be­cause he or she would not re­al­ize a sig­nif­i­cant gain after fees and com­mis­sions are paid.”

Here’s a look at how the gain on the sale of a $500,000 house and the pur­chase of a $400,000 house would be re­duced: ex­penses on the sale would in­clude real es­tate com­mis­sions (usu­ally about 5%, or $25,000), the land trans­fer tax (a lit­tle more than 1%; in this case, $5,775) and le­gal and clos­ing fees of at least $1,100. So, the client would re­al­ize a max­i­mum gain $68,125 by sell­ing a home worth $500,000 and down­siz­ing to a home worth $400,000.

That’s be­fore mov­ing ex­penses and l aw so­ci­ety sur­charges and dis­burse­ments, which can be as high as $2,500, ac­cord­ing to Harry Debi, bro­ker of record with Fu­ture­home Realty Ser­vices Inc. in Vaughan, Ont.

Whether down­siz­ing to a smaller home or ac­quir­ing a con­do­minium, Debi sug­gests, a good rule of thumb is that the home be­ing ac­quired must have a value that is at least 30% lower than the value of the ex­ist­ing home.

A smaller home may re­sult in lower prop­erty taxes, util­ity bills and main­te­nance costs, which are 2%-4% of the value of the home an­nu­ally, de­pend­ing on the age of the home, Dally notes.

Clients who down­size and choose to buy a condo must be aware that in ad­di­tion to prop­erty taxes, they must pay monthly condo fees, which are 45¢-75¢ per square foot, de­pend­ing on the lo­ca­tion, Debi says. Fees for lux­ury con­dos can be $1 or more per square foot.

Clients who buy a new home as part of their plan should be re­minded that they must pay GST (or HST in prov­inces that have HST, such as On­tario).

Emo­tions are a big fac­tor in down­siz­ing or mov­ing to a new lo­ca­tion, says Debi, who has been in the real es­tate busi­ness for al­most 30 years: “It might sound ap­peal­ing, but a lot of older peo­ple find that mov­ing out of the com- mu­nity in which they have lived for many years or into a res­i­dence with much smaller space is hard.”

Sell­ing the house and mov­ing into a rented house or apart­ment is an­other op­tion. Again, this strat­egy works best when mov­ing into a real es­tate mar­ket in which prop­erty val­ues are sig­nif­i­cantly lower.

Con­sider the case of one client who sold his house in the sub­urbs of Toronto, where he had lived for 19 years, and moved into rental hous­ing in Colling­wood, Ont., a re­sort com­mu­nity 140 kilo­me­tres north of the city on Geor­gian Bay.

An “empty nester,” this client says he chose to move out of the city be­cause down­siz­ing within the city would not pro­duce a sig­nif­i­cant fi­nan­cial gain. Mov­ing away from the city af­fords “a bet- ter qual­ity of life,” he says, with “less stress, less pol­lu­tion and less con­ges­tion.”

This client bought his house in 1998 for $525,000. He added $175,000 in up­grades be­fore sell­ing last year for $1.8 mil­lion. After ex­penses such as com­mis­sions, l and trans­fer taxes and le­gal fees to­talling $125,000, his net gain was $975,000. He now rents a four-bed­room house in Colling­wood — with swim­ming pool, ten­nis court and lake ac­cess — for $2,300 per month.

This client as­sumes that at a min­i­mum rate of re­turn of 4% on his gain, he will re­ceive $39,017 in an­nual in­come. He will also save ap­prox­i­mately $40,000 in an­nual main­te­nance ex­penses and $10,000 in prop­erty taxes.

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