Downsizing a Home
Whether you are a Senior Citizen or have parents who are becoming one, you will understand that beyond health care concerns, the home presents one of the biggest challenges. It is filled with furniture, collections, clothes, tools, food, records, and notes; but most importantly with memories of every type. Most of the homes in which I have lived had more good memories than bad and I didn’t want to leave. Life intrudes on our plans however and we find ourselves loading up the truck and off we go. Fortunately, the memories, which are most clear go with us in the great moving van of the heart – our brain.
When you look at that current home through purely logical eyes you will see it as a structure designed to support a life or several lives. It can be hard to get to that mind set. You will find that that is the best way to approach this important question. Once you and your memories walk out that front door for the last time, the house is really just an asset.
So what do we do? Occasionally we think that our children or our grandchildren might want the property and sometimes we are right about that. But if they intend to move into it while living more than 100 miles away just before the move, then it is a major adjustment involving jobs, schools, doctors, and changing friends. All in all, it is rarely a good idea to adjust all that just for the sake of a house. And there are considerable tax implications if that transition is done improperly – most significantly by just giving it to them.
If you paid $139,000 for the home and it is now worth $359,000 some decades later – giving it to them will at the very least cause them to pick up the same basis for the home that you had. They will owe a tax burden associated with that $220,000 gain. The same home left to them in a will or trust has none of that. So consulting with a Realtor and a CPA about the implications – well, that is a very important To Do for your list.
If you think the property would make a good rental – and trust me it usually does – then that same 100 miles can be a burden to your dear relative as they try to manage it from afar. If the market is at the bottom, well that is not the best time to sell, is it? Hiring a competent property management company to take charge is often money well spent. Here is an example. Let’s say you own the property free of debt and only pay $200 per month in taxes and oh, perhaps $60 for insurance. If it rents for $1,700 and the company charges $170 to manage it. Then you or your dear relative net $1,270 per month in income. But that is not the best part. In California the normal increase in property values is about five percent per year, not counting the recent down turn. Remember the house is now worth $359,000. So the increase would be an additional $1,495 per month in value. That is more than the actual net rent!
We are heading into an unusually active time in the history of real estate as the next generation comes of house-buying age. They are called the Millennials or Generation Y and they are 73,000,000 strong. The first of them turns 32 this year being born in 1980. They have held back far too long and the pent up demand is enormous. So buckle up because this next ten to fifteen years is going to be outrageously exciting. These new buyers will generally start at the bottom of the market with a modest home or a condominium, exactly where it has been stuck for the last six years. That will free up the Seller of that home who can now move up in quality or size or down size and so the whole market begins to move again.
Another alternative is to Sell your property where you now live and buy property elsewhere. That way as the market rises at least you won’t miss out on that part of the increase in value. I must admit that it would be difficult to find anywhere that the gains will better than Southern California. The first of the Baby Boom generation turning 66 this year are headed our way for that home with the palm tree they have dreamed about since Super Bowl XXXVII crossed their TV screen in 2003 inside their snow clad Minneapolis home. So you can sell and still obtain the gains of the rising market if you put your money back into real estate.
In any case, because your situation is unique to you, it is best to meet with experts who understand the market and more importantly, your needs. It would be my pleasure to meet with you and ask the questions that will maximize the effect of your property goals. I’ve been at this for over two decades helping families answer this very important question – should I sell it, rent it, or deed it?