Financial Planning - - SPECIAL REPORT: REAL ESTATE -

How it works: “We an­a­lyze the eq­uity in a client’s home,” says Lois Basil of Basil Fi­nan­cial Group. “If it is less than 50% lever­aged, we rec­om­mend think­ing of ways to un­lock that real es­tate eq­uity. This ap­proach is markedly dif­fer­ent than what is in the fi­nan­cial press, where the ad­vice of­ten is to pri­or­i­tize pay­ing off your mort­gage. “While not hav­ing a mort­gage may make sense for some peo­ple, we have found that al­ways hav­ing a mort­gage is a sound and tax ef­fi­cient strat­egy,” Basil says.

“Our goal when work­ing with clients is to min­i­mize their tax li­a­bil­ity. Peo­ple of­ten mis­un­der­stand that much of their in­come in re­tire­ment is taxed at or­di­nary in­come rates. We want to work to make sure our clients are tak­ing ad­van­tage of every avail­able de­duc­tion to re­duce their tax­able in­come.”

For ex­am­ple, Basil Fi­nan­cial Group will even rec­om­mend 30-year mort­gages for 80-year-old clients. “Their re­tire­ment in­come is still be­ing taxed at or­di­nary in­come rates, and we want them to keep more of their money,” Basil says.

Up­side: The strat­egy re­duces tax­able in­come. For most clients, their home is their largest as­set. “Hav­ing your house illiq­uid does not pay for health care, does not fund ed­u­ca­tion and doesn’t buy gro­ceries,” Basil says. What’s more, mort­gage in­ter­est rates are de­clin­ing af­ter a post­elec­tion spike.

Risks: There might not be enough in­come to pay the mort­gage. It’s also pos­si­ble the value of the real es­tate will go down, prop­erty taxes will rise and un­ex­pect­edly large home-im­prove­ment re­pairs will be needed. “The big­gest prob­lem we have with this strat­egy is over­com­ing clients’ ob­jec­tions based on the psy­cho­log­i­cal free­dom they have that comes from not hav­ing a mort­gage,” Basil says. “Some­times, emo­tions can’t trump a sound fi­nan­cial ra­tio­nale.”

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