Retired? Or Wannabe? For 50+

Retired or wannabe?


Seniors Real Estate Specialists (SRES®) are licensed salespeople or brokers, members in good standing of the National Association of REALTORS®, who have taken the additional hours of training needed to help senior clients make wise decisions when buying, selling or investing in real estate. Many seniors have not invested or sold in years and their issues, requirements and needs are special in order to protect and enhance their equity.


SRES designees belong to the Senior Advantage Real Estate Council® (SAREC®) which offers the SRES designation nationally to those REALTORS® who have demonstrated the requisite knowledge, experience, insight and expertise to be a Seniors Specialist. The Council also offers its members frequent updates on senior housing issues.

The Profitable Use of Every Dollar of Your Real Estate Equity

Yosemite National Park Half Dome

“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 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 Estate Specialist®, 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 Specialist®, CPA, and Attorneyare 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.


Certain questions have come up repeatedly over the course of numerous planning sessions with prospective senior sellers. The following list summarizes the fifteen 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.
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?

Old House

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 (in 2007 it is 15%) and perhaps your State government* (in California it is about 9% 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.
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 consequences.
*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 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:

Yosemite Bank

  • 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 personalresidence 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 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.

RED ALERT #1 This law was modified in 2004-you must have owned the property for at least five years before you can sell it as your primary residence and exclude the $250,000 or $500,000 capital gain.

RED ALERT #2 !! Unfortunately, the Housing Assistance Act of 2008 just modified this law again to make it more difficult to get a tax break on vacation home appreciation. Effective January 1, 2009, the Homeowner’s Exemption (Section 121 of the Tax Code) will not apply to periods of “nonqualified use”. Nonqualified use refers to periods that the property was not used as the taxpayer’s primary residence. So the gain that occurred while the property was rented will be subject to capital gains tax. Thank goodness this is not retroactive to periods of time prior to 1-1-09. For example, a property rented from 2006 to 2009, then lived in from 2009 to 2011 would qualify for the full exclusion. The allocation rules only apply to periods prior to conversion to a primary home. thus, if a property was lived in for 2 yeArs, then rented out for 3 years, and sold, the taxpayer will still receive the entire exclusion amount.
It is important to consult with your Seniors Real Estate Specialist®, CPA, and the rest of your financial team. Perhaps a combination of tax-free profits and the installment sale could save you thousands of dollars and give you management-free income for the rest of your life.
The installment sale is certainly one of the more beneficial provisions that the government has created with the IRS code. It allows deferring the payment of federal taxes in any sale on the equity that is taken back by the Seller as a Trust Deed (Mortgage). Until a client receives any principal return on the Note (cash received), the client does not have to pay any tax on their equity. If a first or second trust deed (mortgage) is “carried back” on the property being sold, and is payable at “interest only,” then none of the principal is subject to any tax consequence until it is received (cashed in) by the client. The interest received is taxed as ordinary income. This is called an installment sale. The amount of cash that you do receive as a down payment can be coordinated with the $250,000/$500,000 federal tax exemption to reduce or eliminate your tax payment at time of sale.
If you live in one of the units of an income property and you treat it as your home, you can also coordinate these programs along with a 1031 tax deferred exchange. You could “buy down” into a smaller condominium, retirement home, or property either where you live or anywhere in the country.
As you can see, taking the time to discuss and analyze your exact tax situation prior to the time of sale can save you an enormous amount of money. The money you don’t have to pay in taxes now can be used by you to generate interest income to you until the time you receive cash and have to pay the full tax consequence.
Wait a minute, I’m 65 years old and I can’t wait 30 years for my money. I’m not the bank!
This is one of the many misconceptions of property owners who have owned their real estate for many years. The reality is that a customized tax deferred installment sale can be created for you. You can receive your principal (equity) in as little or as long a time as you personally need. For example, you could create a note for one, three, five, or even ten years or longer. The amortization schedule (the amount of principal and interest received monthly to equally payoff the debt) can be set up for thirty years (which is the standard time used by most savings and loans and banks), but the due date (payment in full date) can be whatever you establish. The length of time can be based on your personal economic situation and financial planning.
Because the “carried back” principal amount is not subject to any federal taxes until received, you will pay taxes only on the interest you receive. What this means is that the percentage of your equity that may have been subject to capital gain taxes is now invested and earning interest daily.
Check the financial section in your local newspaper today for the rates for three and five year certificates of deposit (CDs). At the same time, look at the interest rates that are currently being charged on first trust deeds. You could probably obtain at least 1-2% more interest than from the CDs by “carrying back” paper on an installment sale.
Properly done, you could obtain a higher, secure and controlled return on equity.
Best of all, the interest you received would be on both your tax-free equity (per IRS guidelines) and taxable (deferred) dollars. With proper planning and professional advice, you can structure any transaction to be beneficial to you.

5. Isn’t carrying the loan too risky? How would I know who is a good credit risk?
This is an important question, particularly in today’s market. With the Installment Sale concept, you do act as the lender or the bank and must be very cautious about screening your potential “borrower.”
Proper advance planning will allow you to analyze the credit, financial statements, and any other pertinent information of a prospective purchaser in exactly the same way as a bank. When analyzing these documents, a Seniors Real Estate Specialist®, along with your CPA and Attorney, will assist you in evaluating and analyzing the credit worthiness of your particular buyer. Please keep in mind that all of these recommendations are based upon the buyer/investor
placing a substantial down payment on the property.

6. What’s the worst thing that could happen to me if I carried back some of my equity in a trust deed (mortgage)?
The very worst scenario is that you would have to foreclose on the property. Then you would own it again. The Buyer would forfeit the down payment and other moneys that were paid to you. A specialized service company would do the entire foreclosure process. As horrible as this sounds, less than 3% of all the sellers with installment sales are ever put into this situation, and most of those occur because buyers use very low down payments. Those owners have very little equity to protect. I recommend that a First Trust Deed (mortgage), and only a First Trust Deed (no seconds!) secure any financing “carried back.”
Your financial plan will require a substantial down payment and detailed credit checking, along with a complete analysis of the buyer’s ability to pay. This puts you, as an investor, in a very favorable position. However, there is always the possibility that changes in the market could occur and a major recession or depression could hit. Then the question would be: “Am I better off having this real estate or having my money in a financial institution?” These questions require time, planning, and discussion to evaluate the tax ramifications of selling for cash versus creating a personal tax deferred program. Your REALTOR®, CPA, and attorney are invaluable here.

7. This sounds interesting. Could I keep my money out at interest for a longer period of time?
This is often asked, and the answer is generally yes. As long as the note is secured by the property, you keep your equity earning interest and tax deferred. The interest rate you receive might have to be flexible, depending on the marketplace and timing. If the interest rate is too high, the buyer might want to refinance and pay off the loan. Many clients who sell their property and become investors realize the continuing tax benefits of keeping their trust deed current and interest rate flexible so that the buyer will have a market rate incentive to make payments. They also discover that they can carry their loan for a specific period of time and then renew it for another specific period. Obviously, all of the installment sales we’re talking about must have the proper protection clauses in them. An acceleration clause, notice of default, late charge provisions,and other protections can be placed on all of these instruments giving you the right to control the situation in the event the property might be resold.

8. What if I did an installment sale, and then I needed cash in an emergency? Can I do this?
The answer to this is YES. You have two or three options. One of the extraordinary benefits of an installment sale is that you can carry back equity with beneficial tax consequences and at the same time have an asset that, in the event of an emergency, is very liquid. A trust deed (mortgage) in an installment sale that has been “seasoned” (meaning that payments have been paid regularly for a period of time) can be borrowed against by you or sold. First, you could sellthe note, although you don’t have to. The sale of any note and trust deed does create a tax problem. Most trust deeds and notes are sold at a discounted value from as low as 5% to as much as 25%—sometimes even more. However, borrowingagainst it could be a very creative way to solve your cash flow needs.
Second, a bank or other financial institution can generally lend you up to 50% or more of the current value of the loan. So for every $100,000 of equity that you “carried back,” you could borrow $50,000 of that amount fairly easily, and often at a very competitive interest rate. The advice of your CPA or tax attorney is needed to determine the proper procedures to meet your needs.

9. I’ve heard that a 1031 exchange can save me money. How does it work?
People get confused between the tax-deferred exchangeand the installment sale. The 1031 exchange is basically designed for trading income property, a vacation home, or vacant land. You would be exchanging your equity in one property for another such property. To be tax deferred, it has to be of equal or more value than the property you are selling or trading.
If you live in one of your units or decide to convert your residential property into an investment property, an exchange could have strong tax saving possibilities. You could also depreciate the property and create another tax benefit. A 1031 exchange, however, is totally different from the installment sale that I previously discussed. Again, proper analysis of your individual situation by an experienced Realtor® along with an accountant and tax attorney can help you to determine the value of a 1031 exchange. It doesn’t work for everyone, but for certain clients, it is the only way and provides an absolutely exciting opportunity. The delayed exchange allows you to find a Buyer for your property, place your equity with a qualified accommodator, and then buy/trade for another property across town (or across the country) and be totally tax deferred. You could still have the income producing benefits of all your equity.

Senior Chili Trophy

10. 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. We’ll talk about negative equity a bit later. 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. It does not yet have the confidence of many seniors. One problem seems to be that often there are very high costs deducted from the loan right at the start. Please contact your local Reverse Mortgage Consultant for a free interview before signing any documents, or visit .

11. 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.
However, Life Estates can be very effective if you own an income property—for example, a 6-8 unit building where you are living in one unit. That unit could be left in your control as a Life Estate. You could sell the property, get away from the management responsibilities, and still have a place to live for as long as needed. Again, a personal review with your Seniors Real Estate Specialist®, Attorney, and your CPA are critical.

12. 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. The State of California adopted the same exclusion for their capital gains taxes.

13. There aren’t any more capital gains, 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% (prior to that it was 28%, and in 2007 it is 15%) 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.
For Example:

  1. A single client sold a home in California for $450,000 with a basis of $60,000. Even with the new tax laws, the original purchase price (basis) is still important. The actual amount subject to capital gain is the difference between the net sales price (after the basis and all selling fees are deducted) and the income tax exclusions ($250,000/$500,000). In this case, the expenses of $41,500, basis of $60,000, plus the exclusion of $250,000 (single person) were deducted, leaving $98,500 subject to capital gains.
  2. However, clients in Bozeman, Montana sold a 4-plex (they lived in one unit) and needed to know their basis in the property to determine the amount of their taxable gain. Basis is the acquisition cost of the property plus any capital improvements, such as roof, plumbing, etc., and is subtracted from the sale of that property along with the sale expenses. Generally speaking, the difference between the gross acquisition price and the net sale price less your exemption represents capital gains and is taxable.
    All real property is generally subject to a maximum federal capital gains tax rate plus whatever your local state tax requirements call for. In fact, in some instances, the sale today, when added to other sources of income, might move you into a higher capital gains tax bracket. Capital gains tax has not gone away.
    As you can see, it is imperative when planning the sale of your property that you consult with a Seniors Real Estate Specialist®, CPA, and Tax Attorney who are aware of all the tax consequences.

14. 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.
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?

Senior 75th Birthday Celebration

15. How can I be sure that I’m doing the right thing and Using my equity to its optimum?
If you are over fifty and your children are out of school, consider selling the family home. What if you take your equity and purchased a duplex, triplex or fourplex with an owner’s unit? It could be in the same neighborhood that you’re living in now, or out in the country, maybe even in a golf community. The 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.

How a Seniors Residential Specialist (SRES) Can Help

For many homeowners over 50, their home is their largest asset. Structuring the sales transaction to retain as much of their equity as possible is critical. A Seniors Residential Specialist, or SRES, has obtained this designation from the National Association of Realtors, and must have handled a number of real estate transactions for senior clients. Their training includes:

  • Distinguishing characteristics and trends of the 50+ market
  • Mastering the vocabulary of the range of housing options for the 50+ market.
  • Recognizing mortgage finance and loan schemes and scams that victimize 50+ borrowers.
  • Identifying key life stages, viewpoints, and transitions in relation to housing choices.
  • How a home can be adapted for safety, comfort, and aging in place.
  • Helping clients integrate disposition of real property into estate plans.
  • How a team of experts can help serve 50+ clients and customers.
  • The uses, benefits, procedures, and issues involved in reverse mortgages.
  • The uses of pensions, 401k accounts, and IRAs in real estate transactions.
  • Understanding how Medicare, Medicaid, and Social Security impact 50+ real estate decisions

Basically, an SRES designee is trained to help seniors make wise decisions about selling the family home. He also offers knowledge about financing, buying or selling rental properties and managing capital gains. He also can explain current trends and opportunities for seniors in the housing market. They also work with trustees for estates and children who have inherited family property. An SRES Realtor cannot give legal or tax advice, however, they maintain referral relationships with accountants and real estate attorneys so they can refer their clients to those professionals as needed. They can help deal with personal possessions and help clear out the house and get it ready for sale.
If someone is entering into a real estate transaction at an older age, it’s for an important reason — they lost a spouse or they need to downsize. Or they are going to an assisted living facility. Their relatives may be too far away to help. Not all older home sellers are looking to move into assisted-living or age-restricted communities. Some are. But others merely want to downsize into more manageable quarters.
The REALTOR® with the SRES designation is specially trained to provide help and recommendations beyond the scope of the normal real estate transaction itself. She is used to counseling elders and their families over a longer period of time prior to actually marketing a property. She can also assist in identifying where the elder will move to. Will it be to an apartment in a relative’s home? Will it be a purchase of a condo or ranch? Or will it be a move to a rental unit, town elder housing, congregate housing, assisted living or nursing home? The SRES agent will assist in all these decisions when asked.
Sometimes older clients feel like “first-time buyers”. They haven’t had to buy or sell for many years, and now, all of a sudden, they have to understand all the new laws and red tape. When they bought their house, the contract may have been one page long. Now, it’s about 18 pages. And the disclosures can run another 20 pages. While help with navigating the paperwork is one of the benefits seniors can realize with a trained SRES Realtor, another is finding out about recent laws and options that apply to seniors that might not apply to other property owners.

Some actual case studies might help you to put these options into perspective.
An SRES recently represented a client who owned a property in Santa Monica, California. The property was worth about $850,000, and she had lived there for nearly thirty-five years. She decided it was time to sell and had already spoken with several brokers. One had brought her a cash buyer for $850,000. However, she had not yet signed anything when she called the SRES. Their discussion provided the following information.
She and her husband had acquired the property for $27,000 and then subsequently divorced. She then acquired her husband’s interest in the property for another $25,000. Her entire basis in the property was approximately $60,000.
If she had sold the property for $850,000 cash, her net after expenses would have been about $800,000. Less her exclusion of $250,000, she would have had approximately $500,000 still subject to capital gain. With a combined California State and Federal Tax Rate of 24%, her capital gains tax could have been as much as $120,000. She was 64-years-old and still working, but looking to retire and take life a little bit easier.
By analyzing her tax situation and finding out exactly what she wanted to do, the SRES Realtor was able to create a sales scenario that accomplished the following:

She received a $300,000 down payment. After deducting the basis and sale expenses, her realized gain was approximately $740,000, from which she deducted her $250,000 exclusion. Only about 58% ($173,000) of the down payment was subject to capital gain. Her federal and state tax of 24% was approximately $41,000, thereby deferring nearly $100,000 of gain while receiving 7% interest on it as part of the trust deed.
She carried back a tax-deferred $550,000 note secured by a First Trust Deed (mortgage) at 7% interest, payable interest only, ($3,208) per month for 5 years with an option to renew.
She purchased (putting 50% down) a smaller, nearly new condominium in Santa Monica more than adequate to provide her with the home that she needed.
She received the cash flow she needed to retire. She now has a $3,208 monthly income from her equity in addition to other income. Plus, she has a beautiful new home, instead of the 67-year-old home with a leaking roof. To date, she has paid no capital gains tax on the sale and has placed herself in a financially secure position.

Now let’s discuss clients who, by making very quick decisions without planning, put themselves into a very different position. Recently, a retired couple in Palm Beach, Florida decided to sell their home for $1,900,000. Being quite anxious because of a recent illness, they contacted brokers, received an offer, accepted it, and entered into a firm contract. Only after signing final papers did Dad decide to have a discussion about the pending sale with his family. His parents’ basis and closing costs were about $230,000, and even with their one time exclusion of $500,000, the amount subject to capital gain was over $1,170,000. They paid taxes of over $400,000 on this sale(this was in 2002).
Even though already successfully retired, the purpose of the sale was to raise additional funds so that he and his wife, who was ill, could relocate to a smaller home without invading any other capital funds. They also wanted to give some money to their children. This could have been accomplished much more effectively. Instead of paying Uncle Sam over $400,000 of their equity in taxes, they could have used the installment sale. Selling the home for $1,900,000 with $600,000 down payment (tax free because of the $500,000 exemption plus $130,000 in selling costs), they could have carried a first mortgage for $1,300,000 at 6.5%. Approximately $320,000 in taxes could have been deferred, and the couple would have received approximately $21,000 taxable interest per year on those deferred funds. Interest that could have been used to fund their children and grandchildren’s financial future.
Lack of pre-planning, coupled with a quick decision without analyzing all of the ramifications and foregoing competent advice from those professionals who were available to help, cost this couple, their children, and grandchildren the use of a substantial amount of money. Good planning, proper discussions, and good professional guidance would have enabled them to take the right steps.

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.
Don’t forget our original premises . . .
“A good real estate investment is worth A lifetime of labor”and
“It’s not what you sell it for that counts; It’s what you get to KEEP!”

Reverse Mortgages

Reverse mortgages are available to homeowners 62 and older, and they don’t have to repay the loan until the house is sold or passed on. Homeowners can help themselves by using a reverse mortgage to supplement daily living expenses, or anything else the borrower chooses. Some other common uses for the loan include paying off a mortgage or other debts, making house repairs, buying a vehicle or boat, traveling, or investing. Reverse mortgages are backed by the federal government to insure homeowners it is a safe and regulated transaction.

People who expect to live at home for many years should consider a reverse mortgage. Unlike conventional mortgages, there are no income requirements for these loans. Borrowers do not need to make any loan payments for as long as they (or in the case of spouses, the last remaining borrower) continue to live in the home as their main residence. When the last borrower moves out of the home or dies, the loan becomes due.

Common Misconceptions About Reverse Mortgages

  1. A reverse mortgage is where the bank takes your house at the end
    Incorrect! With a reverse mortgage you and your spouse continue to own the home, and are the only names on the deed or title. Reverse mortgages are designed to tap only a portion of your equity, so you may be able to pass on an inheritance, or have money left over from the sale of your home should you decide to move.
  2. Reverse mortgages are only for desperate seniors
    Incorrect! This type of loan is used by homeowners from all walks of life to enhance their retirement years. The growing popularity of this product highlights its benefit to help homeowners deal with many different financial situations.
  3. You must be debt-free to qualify for a reverse mortgage
    Incorrect! Even seniors with an existing mortgage and other debts may qualify for a reverse mortgage. The reverse mortgage can eliminate the need to continue to make monthly payments on that debt, freeing-up valuable cash on a monthly basis.
  4. When a reverse mortgage comes due, the bank sells the home.
    Incorrect! When the loan must be repaid, you or your heirs can either pay the balance due on the reverse mortgage and keep the home, or sell the home and use the proceeds to pay off the reverse mortgage. You or your heirs keep money left over from the sale of the home, above and beyond the reverse mortgage balance.

How Much Money Can I Get?
The amount of funds you are eligible to receive depends on your age (or the age of the youngest spouse in the case of couples), the appraised home value, interest rates, and in the case of the government program, the lending limit in your area. In general, the older you are and the more valuable your home (and the less you owe on your home), the more money you can get.

Does My Home Qualify?
Eligible property types include single-family homes, 2-4 unit properties, manufactured homes (built after June 1976), condominiums, and townhouses. In general, cooperative housing is ineligible.

Are There Any Special Requirements to Get a Reverse Mortgage?
As long as you own a home, are at least 62, and have enough equity in your home, you can get a reverse mortgage. There are no special income or medical requirements.

What If I Have An Existing Mortgage?
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so any existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
For example, let’s say you owe $100,000 on an existing mortgage. Based on your age, home value, and interest rates, you qualify for $125,000 under the reverse mortgage program. Under this scenario, you will be able to pay off ALL the existing mortgage and still have $25,000 left over to use as you wish.
If, however, you only qualify for $85,000, then you would need to come up with $15,000 from your own savings to get the reverse mortgage. Even then, all the money from the reverse mortgage will have been used to pay off the existing mortgage. On the other hand, you won’t have a monthly mortgage payment anymore.
If you find yourself in a deficit situation where you don’t have enough money to pay off the existing mortgage, you may use funds from a grant or gift from a family member or friend to cover the gap, but you cannot incur a new debt obligation (i.e., loan).

Will I Lose My Government Assistance If I Get a Reverse Mortgage?
A reverse mortgage does not affect regular Social Security or Medicare benefits. However, if you are on Medicaid, any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain would count as an asset and could impact Medicaid eligibility. For example, if you receive $4,000 in a lump sum for home repairs and spend it all the same calendar month, everything is fine. Any residual funds remaining in your bank account the following month would count as an asset. If the total liquid resources (including other bank funds and savings bonds) exceed $2,000 for an individual or $3,000 for a couple, you would be ineligible for Medicaid. To be safe, you should contact a Medicaid expert.

Why Do I Need to Get Counseling?
Counseling is one of the most important consumer protections built into the program. It requires an independent third-party to make sure you understand the program, and review alternative options, before you apply for a reverse mortgage.
You can seek counseling from a local HUD-approved counseling agency, or a national counseling agency, such as AARP (800-209-8085), National Foundation for Credit Counseling (866-698-6322), and Money Management International (877-908-2227). Counseling is required for all reverse mortgages and may be conducted face-to-face or by telephone.
By law, a counselor must review
a) options, other than a reverse mortgage, that are available to the prospective borrower, including housing, social services, health and financial alternatives;
b) other home equity conversion options that are, or may become, available to the prospective borrower, such as property tax deferral programs;
c) the financial implications of entering into a reverse mortgage; and,
d) the tax consequences affecting the prospective borrower’s eligibility under state or federal programs and the impact on the estate or his or her heirs.

How Can I Use the Proceeds from a Reverse Mortgage?
The proceeds from a reverse mortgage can be used for anything, whether its to supplement retirement income to cover daily living expenses, repair or modify your home (i.e., widening halls or installing a ramp), pay for health care, pay off existing debts, buy a new car or take a vacation, cover property taxes, and prevent foreclosure.

Using a Reverse Mortgage to Stay at Home: Three Family Examples

Home equity can be a useful source of cash to make living at home easier. It can be the “glue” that holds your financial plans together in retirement. Let’s consider the situation of three families who take out a reverse mortgage. They live in a house that is in good repair and worth $150,000. They own their homes free and clear of any debt.

Family #1:Hal and Joan Estes (ages 69 and 65) bought long-term care insurance that will pay for services when they need help with personal care (such as bathing, dressing, or eating) or Alzheimer’s disease. For now they can still manage on their own, but want to add a bathroom downstairs to reduce the strain of climbing the stairs. Based on Joan’s age, the Estes receive a total of $75,000 from their reverse mortgage. They use $20,000 of the loan to install a new bathroom. They keep the rest ($55,000) in a line of credit. These funds can be used to meet any additional expenses before they become eligible for services under their long-term care insurance policies.

Family #2:Lou Johnson (age 75) relies on community services such as Meals on Wheels and help from a homemaker to live at home. His big concern is his old furnace. He receives $90,000 from the reverse mortgage and uses $4,000 to replace the furnace. To get the loan, he also had to spend $6,000 to replace the old siding and do other repairs. It gives him peace of mind, knowing that his house is fixed and will grow in value over time. He keeps the rest ($80,000) in a line of credit to pay for extra help as needed, and to get new tires for his car. It can be challenging to find the money to pay for all the things you’ll need to live at home. A reverse mortgage provides added flexibility to the family budget by letting you pay for the things you want when you want them.

Family #3:Maria Moniz (age 84) has arthritis, which makes it difficult to manage on her own. She pays a neighbor $1,000 per month to help around the house. But when she needs more assistance from a home health aide, her monthly bill for services can be over $3,000. At her age, Maria receives $106,000 from a reverse mortgage. Her line of credit would cover monthly expenses of $1,000 for over 12 years, or $3,000 each month for over 3 years, at the current interest rate.
Reverse mortgages can pay for help at home for many years. The average home health aide charges about $72 for a four-hour visit, which adds up to $2,160 per month for daily care. Adult day care services cost on average about $56 per day, or $1,120 per month.

Since lenders offer higher loan amounts at older ages, an 84-year-old borrower would be able to pay for more assistance, or for a longer period.

Types of Reverse Mortgages
Home Equity Conversion Mortgage (HECM)—This program is offered by the Department of Housing and Urban Development and is insured by the FHA. HECMs are the most popular reverse mortgages, representing about 95% of the market.
Fannie Mae Home Keeper Loan—Borrowers can receive more cash from these loans than with a HECM since the loan limit for this product is higher.
Financial Freedom Cash Account Loans—This product is available to seniors who own homes that are worth more than $600,000. These “jumbo” loans are especially helpful to homeowners with expensive homes since there is almost no maximum home value under this plan.
Loan amounts can vary by tens of thousands of dollars among the three types of reverse mortgages available in the market. The amount that you can borrow is based primarily on the age of the youngest homeowner, the value of the home, the type of reverse mortgage, and the current interest rate. To find out how much money you may be able to get from a reverse mortgage, use the simple, on-line calculator offered by AARP (
Loan Costs
Most of the costs borrowers pay are similar to those of a conventional home loan or to refinance an existing mortgage. These can include an origination fee, appraisal fee, and third party closing costs (fees for services such as an appraisal, title search and insurance, surveys, inspections, recording fees), and a mortgage insurance premium. Most of these upfront costs are regulated, and there are limits on the total fees that can be charged for a reverse mortgage. Closing costs can be financed as part of the mortgage.
Before closing, you must have the house appraised to make sure that it meets FHA minimum property standards. You may be able to finance the cost of required repairs as part of the loan. If repairs leave you very little money to pay for help at home, however, it may not be worth it to take out a loan. Reverse mortgage borrowers continue to own the home and are responsible for paying property taxes, hazard insurance, and maintaining the home.

What are My Payment Plan Options?
You can choose to receive the money from a reverse mortgage all at once as a lump sum, fixed monthly payments either for a set term or for as long as you live in the home, as a line of credit, or a combination of these. The most popular option – chosen by more than 60 percent of borrowers – is the line of credit, which allows you to draw on the loan
proceeds at any time. The money borrowers receive is tax-free, and can be used for any purpose

What Is the Service Fee Set-Aside?
Under the FHA HECM program, you are charged a monthly servicing fee that ranges from $30-$35 to manage your account once the loan closes. The SFSA is an estimate of what the total servicing fees will be over the life of the loan, by multiplying your life expectancy (converted from years into months) multiplied by either $30 or $35. Although it’s not considered a closing cost, the SFSA can equal several thousand dollars, which is deducted from your available loan proceeds. You do not have access to that money, nor do you earn interest.

How Does the Interest Work on a Reverse Mortgage?
With a reverse mortgage, you are charged interest only on the proceeds that you receive. Most reverse mortgages charge a variable interest rate (although fixed rate products are entering the marketplace) that is tied to an index, such as the 1-Yr. Treasury Bill or the London Interbank Offered Rate (LIBOR), plus a margin that typically adds an additional one to three percentage points onto the rate you’re charged. Interest is not paid out of your available loan proceeds, but instead compounds over the life of the loan until repayment occurs.

What is the “Growth Feature” on the Unused Balance in the Line-of-Credit Option. Does that Mean I’m Earning Interest?
No, you’re not earning interest like you do with a savings account. The growth factor, which is equal to roughly the interest that you’re being charged, takes into consideration that your home has appreciated in value over the past 12 months and that you are one year older.

When Do I Pay Back My Loan?
No monthly payments are due on a reverse mortgage while it is outstanding. The loan is repaid when you cease to occupy your home as a principal residence, whether you (the last remaining spouse, in cases of couples) pass away, sell the home, or permanently move out. The amount owed can never exceed the value of your home. Furthermore, if the home is sold and the sales proceeds exceed the amount owed on the reverse mortgage, the excess money goes to you or your estate.

Under What Circumstances Should I NOT Consider a Reverse Mortgage?
Because of the upfront costs associated with a reverse mortgage, if you intend to leave your home within 2-3 years, there may be other less expensive options to consider, such as home equity loans, no-interest loans, or grants that may be offered by your county government or a local non-profit to repair your home, or a tax deferral program, if you’re having problems paying your property taxes. Also, if you want to leave your home to your children, then you should consider other options, because in many cases, the home is sold to pay back a reverse mortgage.

A reverse mortgage enables older homeowners to convert part of the equity in their homes into tax-free income without having to sell the home, give up title, or take on a new monthly mortgage payment. The reverse mortgage is aptly named because the payment stream is “reversed.” Instead of making monthly payments to a lender, as with a regular mortgage, a lender makes payments to you.

Proposition 60: California Seniors One-time Property Tax Break

Senior homeowners who want to buy a less expensive house might get a break on their property tax bill, thanks to a ballot initiative that the state’s voters approved in 1986. This initiative, Proposition 60, said that homeowners older than 55 have a one-time chance to take their present assessed valuation with them if they buy a house that costs as much as or less than the price for which they sell their present house.

Prop. 60 was intended to reduce the burden of an earlier initiative, Prop. 13. That 1978 law limited increases in assessed value, the number used to compute annual property taxes, to 2 percent a year, and limited the tax rate to1 percent of assessed value. One of Prop. 13’s goals was to protect homeowners, especially seniors, from skyrocketing home prices, which led to ever-higher property tax bills.

However, when the home changes ownership, it is reassessed at its current value, usually the sales price. That provision could trip up seniors who have owned their homes for a long time and who bought when prices were much, much lower than they are today.

For example, someone who bought a house for $200,000 in 1980 has an assessed value of $321,687, based on increases of 2 percent per year compounded. His basic tax bill is $3,216.87.

(Most homeowners get a bill for more than 1 percent of assessed value because of other items, such as special assessments, school or other bonds and miscellaneous costs, which vary by area.) When he goes to sell the house, though, it might be worth $600,000. That means the new owner will have a basic annual tax bill of $6,000 on the very same house. Even if the seller wants to buy a smaller less expensive house, it’s likely that his new tax bill will be higher than at his former house.
Prop. 60 gets around that problem by allowing him to take his old tax base with him if he meets certain criteria:

  • He or his spouse must be at least 55 years old and must live in the house.
  • The old house must have qualified for the homeowner exemption or the disabled veterans’ exemption.
  • The purchase price of the new house must be as much as or less than the sale price of the old house.
  • Both the new house and the old house must be in the same county.
  • The new house must be purchased or built within two years before or after the sale of the old house.
  • The homeowner must apply for Prop. 60 relief within three years of the date of purchase.
  • If either the owner or any co-owner has previously taken advantage of Prop. 60, none of them may use it again.
  • If the homeowner buys a new house within two years before selling the old house, the new house must cost as much as or less than the old house.
  • If the homeowner buys a new house within one year after the sale of the old house, the purchase price of the new house may be up to 105 percent of the old home’s sale price.
  • If the purchase takes place between one and two years after the sale, the purchase price of the new house may be up to 110 percent of the old home’s sale price.

The clock starts ticking right away, so even if the purchase is only one day after the sale, the price can be 105 percent of the old price.

Although the sales price usually determines the assessed value, that’s not always the case. Sometimes the buyer and seller agree to terms such as low-cost financing or credits that affect the bottom line despite the sales price. It’s important that the price not be manipulated. If there’s any doubt about the new price passing Prop. 60 muster, the homeowner should consult with the assessor’s office in his county.

And because Prop. 60 has other requirements that may apply only to certain situations, seniors with unusual circumstances should check with their county assessor’s office. You may think it would be impossible to meet all these criteria, but I had a senior client that fit them perfectly. She had been widowed several years and her 3200 square foot house in Groveland was just too big. It had been built in 1992 and was now worth much more than what they paid for it. She found a smaller house in Sonora that cost a less, but was still $530,000. Instead of paying base taxes of $5,300 per year, she is taking her old yearly tax of $2,800 with her.

Prop. 60 limits the transfer of the property tax base to houses within the same county. Another voter initiative, Prop. 90, approved in 1988, gives counties the option of accepting the old assessed value of a senior from another county. Only nine counties accept transfers from another county. They are Alameda, Kern, Los Angeles, Modoc, Orange, San Diego, San Mateo, Santa Clara and Ventura. That means that a senior living anywhere in the state who wants to move into one of those eight counties should check with the assessor to make sure it still accepts transfers.

Choosing a Vacation Home with Retirement in Mind

When you want to get away from it all, where does your heart and mind wander to in your daydreams? Whether it’s beachside, a mountaintop, or a small town, the perfect spot for a getaway home is any place that renews your spirit and let you do the things you love.
What do you want?
To make the best choice in deciding where to buy a second home, shop with a clear vision of what you really want. Ask yourself:

• What hobbies do you want to indulge or develop? If you enjoy antiquing, is there a nearby town with antique shops or a great flea market?
• Do you crave serenity or do your prefer a more bustling atmosphere? If a peaceful environment is at the top of your list, for example, you might want to choose a lake that doesn’t allow noisy jet skis or cigarette boats.
• How often do you plan to get away? It’s easy to “vacation” every weekend if you choose a site that is a two-three hour drive from home.
• How much light do you need? You may prefer a bright beach house instead of a log cabin in the woods.

Does spending more than the occasional weekend at your cottage figure into your plans? Taking retirement or early retirement can open up new possibilities for enjoying your second home. As you shop, keep in the mind that the right location and the right home could be the long-term answer to change – planned or unexpected – that may come your way.
If you’re eyeing a second home as a retirement spot, select one with enough footage to accommodate your future needs, or one that can be remodeled.
In evaluating a retirement location, consider:

  • What’s the quality and accessibility of health care?
  • Is the area safe, with a low crime rate?
  • What’s the cost of living?
  • Are there opportunities for part-time work?
  • Is the climate comfortable?
  • What are the cultural and educational offerings?

When researching for a second home, here are several tips to consider when shopping for a location:

  • Visit a potential getaway for two or more years in a row.
  • Take home-swap vacations to check out different locales.
  • Take a virtual vacation, touring homes and locations on the Internet.

Your motivations and objectives for buying a second home may be more complex as part of a larger plan for retirement and other lifetime goals. If you are thinking of buying a second home, use the experience and knowledge of a Seniors Real Estate Specialist® (SRES®) to carefully guide you through your transactions. SRES® designees are REALTORS® who have demonstrated the knowledge and expertise to counsel senior clients through the major financial and lifestyle transitions involved in relocating, refinancing, or selling a family home. A REALTOR with the SRES designation can also refer you to other professionals such as a C.P.A., estate planner, or attorney who also have a specialty interest in senior clientele issues.

Community Property with Right of Survivorship

By Lauree Borup, RE/MAX Yosemite Gold April 2003

TRUE: Community Property ownership of real estate reduces the capital gains tax the surviving spouse would pay if they sold it
FALSE: Joint Tenancy is the best way for surviving spouses to avoid probate.

NEW: Community Property with Right of Survivorship (CPROS) combines the automatic survivorship rights of Joint Tenancy with the tax advantages of Community Property for married couples in California. It may be the “better” way.
Joint tenancy is a popular device for avoiding probate, since upon the death of one joint tenant the decedent’s interest terminates immediately leaving the survivor holding title. The drawback is that only the decedent’s half of the value is stepped-up in basis. Under Community Property ownership, if a couple paid $100,000 for a home, and at the time of death the home is worth $300,000, the tax basis is stepped-up to the fair market value of $300,000. The surviving spouse could sell the property then without paying any capital gains tax.
Alternatively, if the property were held in Joint Tenancy, only the interest of the first spouse to die would be stepped-up and the basis would be $200,000 (Half of the invested $100,000 + half of the $300,000 current market value). The surviving spouse would pay capital gains tax on $100,000, which would be around $24,000 combined for Federal and State.
If this example were a primary residence it would make no tax difference because the surviving spouse can exclude up to $250,000 of capital gain (not $500,000, since there’s no “couple” any more). So the most tax-helpful use of CPROS is on second homes and investment properties, which abound in Pine Mountain Lake.
For example, Joe and Linda buy a second home in PML for $100,000 and enjoy it on weekends with their family for several years. Their kids go to college, and to generate income, they convert it to a rental. They start taking depreciation write-offs which reduce the tax basis to $40,000. The house would now sell for $300,000 (after paying sales commission and closing costs).

Joe becomes terminally ill. Linda needs to make some careful decisions about how to take title and when to sell. Here are three scenarios:

  1. Quick Sale: Linda sells the house before Joe dies. The profit of $260,000 ($300,000 minus $40,000) is fully taxable, so she pays about $75,000 in capital gains tax.
  2. Joint Tenants: The basis in inherited property is stepped-up to market value at the date of death. Linda inherits Joe’s half of the property, so his half is stepped-up in basis from $20,000 (half of $40,000) to $150,000. Linda’s half stays the same, $20,000, for a total basis of $170,000. When she sells after Joe’s death, only $130,000 is taxable. So she pays about $38,000 in capital gains.
  3. Community Property With Right of Survivorship: Linda owns the property immediately and the basis is stepped-up to 100% of market value. When she sells for $300,000, she pays NO tax.

Linda could also hold the property with the stepped-up basis as a rental and enjoy greater annual depreciation.

Be aware that the tax basis is totally separate from the loan amount. If you have refinanced a house up to the hilt, spent the money, and then sell it soon after your “joint tenant” spouse’s death, you may barely have enough money left over after paying the mortgage debt to pay the capital gains tax.
Upon a spouse’s death the survivor records an Affidavit, which memorializes the termination of the decedent’s interest in the CPROS property in the same manner as a Death of Joint Tenant Affidavit. The surviving spouse inherits the property outright regardless of what they say in their wills.
When is CPROS not appropriate?

  • You hold all your real estate in a trust
  • You want to dispose of real estate through a will to people other than your spouse
  • The only real estate you own is your primary residence and you are not even close to exceeding the $250,000 capital gains exclusion.

Couples owning appreciated real estate may want to use the new law. Check with your attorney to ensure that it is consistent with your entire estate plan. A blank form of the grant deed for use with CPROS can be printed from the website You must also file a Preliminary Change of Ownership form with the County after changing to CPROS. These are available from the Recorder’s Office or your title company.

Eleda Carlson and Lauree Borup at RE/MAX Yosemite Gold are members of the Senior Advantage Real Estate Council, having earned the prestigious and nationally recognized designation –Seniors Real Estate Specialist (SRES®). For more information about this program, email Lauree or Eleda or see the website