- Tying up all of your cash in the home
- Forgetting the costs of selling
Greenwood real estate agents and financial planners advise against buying your retirement home with cash, even if you can afford it. Doing so means that much of your net worth, or the sum total of your assets, including cash, investments, and home equity, etc. minus liabilities, will get tied up in equity in your retirement home.
While this isn’t necessarily a bad thing, since real estate tends to be a relatively safe investment, and as the property’s value grows, so will your net worth grow along with it, it also exposes you to more risk and prevents you from channeling your money towards other investments. Instead, experts recommend taking out a mortgage and making a large down payment.
There’s also home equity. Home equity gains are attained through regular mortgage payments and continual increases in home prices. Home equity usually increases in proportion to overall net worth as homeowners get older.
Buying a retirement home often means selling your current one. You’ll have to spend months, if not years, preparing your home for the sale by making repairs and improvements. You’ll also need to find a seller’s representative who can market your home to potential buyers.
If you intend to sell your current home, factor the costs of selling and moving into your new home into your expenses.
You may also have to pay capital gains tax if you sell the home for more than what you paid for it. However, there are several factors that may exempt you from capital gains tax, including:
- You owned your home for at least two years out of five years leading up to the sale
- The property served as your primary residence for at least two years in within the same five-year period
- You haven’t excluded gains from another property you sold in the two years before you closed the sale on your home Remember that you must live in the home for two years before selling in order to avoid the tax. But for seniors who have transferred to a nursing home, the requirement for residency and ownership will be lowered to just one out of five years. So if they still own the property, but are currently living in a nursing facility, it will still count as ownership.
If you end up buying a multilevel home, you may have to renovate the property in a few years’ time. To avoid having to deal with renovation work, choose a property with age-friendly features, such as a ranch-style home with a walk-in shower and wheelchair access. If you really must purchase a multilevel home, make sure that there’s a master bedroom and bathroom on the main floor.
Moving to a new home is a great opportunity to downsize. And as you enter retirement, you may have belongings that you will no longer have any use for. You may give these items away or put them in storage. Likewise, you may decide to move to a smaller home which requires less upkeep.
However, downsizing isn’t for everyone. If you have a difficult time letting go of your clock collection, which took you decades to build, don’t feel obliged to do so.
The same goes for tools, equipment, and work spaces that let you enjoy your hobbies, such as baking, woodwork, or gardening.
Any homeowner knows that the cost of owning a home doesn’t end with the sales price – utilities, renovations, maintenance, repairs, and homeowners association (HOA) fees all come into play once you move in. It’s important to account for inflation when calculating housing and living costs –according to Statista, inflation rates of 2% to 3% are normal in a modern economy like the US.
The International Monetary Fund (IMF) projects a 2.25% annual increase in general price levels until 2024. That means that a product that costs $100 today will cost $102.25 the following year, and so on. HOA fees also increase annually. But the good news is that these increases are often mapped out three to five years in advance, so talk to your HOA about potential increases.
Moreover, the SC HOA reform bill requires associations to give residents a 48-hour notice before they can decide to increase their annual budget, and conversely, monthly fees.
Property taxes also increase as your home goes up in value. Fortunately, SC has some of the lowest property taxes in the United States, with the average effective property tax rate resting at just 0.57%, which is the fifth lowest in the nation.
SC also offers a homestead tax exemption to elderly homeowners aged 65 and over.
The law stipulates that the first $50,000 of the home’s fair market value (FMV) is exempt from school, county, municipal, and special assessment real property taxes.
The exemption also applies to the surviving spouses of deceased homeowners within the age bracket, provided that the surviving spouse is at least 50 years old. Click here to see if you’re eligible. SC is generally tax-friendly for seniors – the state does not tax Social Security retirement benefits. It also offers a $15,000 deduction for older adults who receive other kinds of retirement income.
Retirement doesn’t mean having to say goodbye to friends and family. You’ll see less of each other once you move into your retirement home, but online tools, such as email, social media, and instant messaging, can help you stay in touch.
If you’re old fashioned, you can send a postcard every now and then to let people know you’re thinking of them.
You can also talk to your family about a visiting schedule – tell them how often you’d like to see your grandkids, but be realistic about your expectations, especially if they’ll be coming from out of state to see you. Ask them if they can make regular visits, or drive out during the holidays.
Looking for the right retirement home in Greenwood, SC? The Wiley Team is here to assist you. Contact us at 864.993.8153 or leave a message here.