Baby Boomers—those born roughly between 1946 and 1964—make up one-third of home buyers, according to NAR’s Home Buyer and Seller Generational Trends, and sources estimate that that 41% of all home sellers are at least 55 years old. Yet, this massive demographic often receives less attention from the real estate market and brokers than other age groups, such as Generation X (those born between 1965 and 1984) and Millennials (those born between 1985 and 1996).
As a result, older home buyers and sellers often don’t get the guidance they need when investing in, or divesting of, property. In fact, many people that are entering their golden years feel stuck and locked-in to what they currently have.
Written by Reeco (the sustainable real estate brokerage providing complimentary solar power systems to all home buyers and sellers), this article contains the must-know insights gleaned from our experience working with clients over 50. By the end of this article, you should understand:
- Why many retirees can afford to buy and/or sell a home even if they believe they cannot
- How to move without losing your property tax basis (and avoid being responsible for hefty property taxes)
- Avoid paying taxes on the gain made from the sale of your home
- The things you should consider when researching and viewing new homes
- What retirees have told us is important when buying or selling–things that popular research doesn’t show
Homeowner Finance 101: Class is in Session
Some retirees want to sell their homes but don’t believe that they could afford to purchase their next one in this seller’s market. Others are intimidated by the unfamiliar process of assessing their home’s value or understanding property tax base rules, and believe that they would be on the hook for thousands of dollars in property taxes when moving.
We understand these concerns. Here is what retiree homeowners should know before buying or selling.
1. Transferring your (affordable) property tax base is possible
Property taxes can be a deciding factor for retirees who want to move to a new home. In California, the passage of Proposition 13 (1978) has created a favorable property tax environment for long-term real estate owners because the “assessed value” of their home (which is used for calculating property taxes owed) is often substantially less than the current “market value.”
Many retirees believe that they will lose their current, favorable property tax base and face increases of up to three hundred percent should they move. This deters them from exploring properties that may better fit their updated needs and lifestyle, such as a smaller, more accessible home or one closer to family members.
“When it comes to avoiding property tax increases, retiree home buyers have more options than they think,” says Daniel Shaunt, Broker at Reeco. “Several counties throughout California have established reciprocal relationships that enable retirees to transfer their property tax base when moving between these counties (should they fit certain requirements). This is referred to as ‘Property Tax Portability’.”
As of April 2018, this list includes 11 counties.
- Alameda County
- El Dorado County
- Los Angeles County
- Orange County
- Riverside County
- San Bernardino County
- San Diego County
- San Mateo County
- Santa Clara County
- Tuolumne County
- Ventura County
As of now, homeowners can move within their same county or between any of the reciprocal counties on the list, as long as:
- They are moving from a primary residence to a replacement home
- One of the homeowners is at least 55 years old
- They sell their current home and buy the replacement one within a 2-year period
- The value of their new home is of equal or lesser market value**
(**For more information about this requirement, reach out to a Reeco real estate agent at 877-967-3326 or Contact@GoReeco.com.)
If you are hoping to move to/from a county that is not mentioned above, there’s good news: the list of reciprocal counties may get much larger thanks to California’s Property Tax Fairness Initiative, a proposition that is designed to expand these retiree property tax rules to the entire state. As of April 2018, the initiative has received nearly one million voter signatures in order to qualify for the November 2018 General Election ballot.
“Whether or not the new legislation comes to fruition, many senior homeowners do have options for moving into homes more suited to their changing needs while maintaining their financial independence,” explains Shaunt. “Unfortunately, many senior homeowners aren’t aware of these ‘reciprocal county’ agreements and as a result, may stay in a less than ideal house for them. That is why it is so important to speak to an experienced real estate professional. At Reeco, we specialize in educating retirees about their options and then locating homes that fit their updated criteria.”
2. You can avoid hefty capital gains taxes when selling your home
You probably already know that money made from home sales is taxable, but did you know about these important caveats that could save you thousands?
- Home sellers are eligible to exclude up to $250,000 of capital gains from taxes
- This number jumps to a whopping $500,000 for married couples who file taxes jointly
- For joint homeowners who aren’t married, each can exclude up to $250,000 if they meet all requirements
These exclusions can enable retirees who have benefitted from real estate value appreciation to move without taking a financial hit, which can be particularly important to homeowners on a fixed budget. There are a few requirements to be aware of, though.
- You can take advantage of this capital gains tax exclusion once every two years
- You must pass the ownership and use test: your home must have been your primary residence for at least two of the five years immediately preceding the sale
- The IRS determines the amount you gain for selling your house using this formula: the selling price minus selling costs, deductible closing costs, and your tax basis on the property.
That last point can be confusing for some homeowners. Let’s break it down in an example: Let’s say that you and your spouse, who own your home together and file taxes jointly, want to sell your home.
You haven’t sold a house and taken advantage of the capital gains tax exclusion within the past two years. You also have lived in your home (claiming it as your primary residence) for the past six years. It looks like you can probably claim the capital gains tax exemption on the property in question, and you are eligible to exempt up to $500,000 of your sale gains.
Now let’s break down the numbers to determine how much of your after sale earnings would be taxed. If you jointly bought your home for $200,000 and sold it for $800,000, your profit would be $600,000. Quite a bit over the $500,000 cap, right? Not so fast.
If you contributed $60,000 toward home improvements in order to sell, that is taken into consideration. $600,000 (the sale price) – $60,000 (home improvements) = $540,000. This ending figure is $40,000 over the tax exemption limit, meaning you will only have to pay capital gains taxes on this small amount rather than the entire $540,000.
(There are other factors, that may impact capital gains from a sale and its recommended to consult with a tax professional to better understand individual situations.) All in all, this math lesson demonstrates that in addition to the opportunity to keep their existing property tax base, retirees also have another great option at their disposal should they want to sell their homes.
If you are retiring or have considered moving into a home that is more appropriate for your lifestyle, but believed it to be out of your price range, it’s time to reconsider!
Home Characteristics that Senior Home Buyers and Sellers Are Looking For
It’s safe to say that not all retirees are looking for the same thing in a home. While some buyers are looking to downsize after empty nesting, others are looking to expand into multi-generational homes that can house older children and aging parents. Some sellers are looking to move away after retirement while others want to stay in the same city or county to be close to family.
However, after working with our retiree clients, our Reeco real estate agents have noticed several important insights and trends that you should be aware of before buying or selling your home.
1. Staying near family and friends is important
“Several of our senior-aged clients made it clear that their main priority when moving was to stay near their family members,” says Shaunt. “I think that there is a common misconception that all California retirees want to move to other states. While that is the case for some home buyers and sellers, there are plenty of older Southern Californians who are looking to stay local.
They have family and friends nearby, and they’ve built communities around where they currently live. Retirees don’t want to give this up, particularly at a time in their lives when they may have more free time than before. Should they not have family in the area, however, retirees are more willing to move to be near children and grandchildren, or to move closer to retirement-friendly areas where they can enjoy relationships with people their age.”
These areas tend to be suburban; retirees are not moving to downtown city areas like younger home buyers.
2. They’re willing to downsize… but only at a cost savings
Some retirees are looking for smaller houses–they want less upkeep and perhaps don’t need as much space now that they are empty nesting. Yet, these homeowners are not willing to downsize at all costs. If the decision doesn’t make financial sense, they are fine with staying put.
“Our Reeco real estate agents have found that, should retirees find that they could afford to sell their home in this seller’s market but not buy a desirable home within the same neighborhood, they will stick with their larger home even if they don’t need the extra space,” says Shaunt. “In these situations, they will often adapt their current space for potential future needs. For instance, they will convert former home offices into bedrooms for grandchildren or guest areas.”
3. Features must stand the test of time
Although first-story living may not be a necessity at the moment, it may be in the future when retirees get a little older and less mobile. More home buyers, in anticipation of their golden years will not invest in property that doesn’t have bedrooms, a bathroom, and a kitchen on the first story.
4. The jury is out on fixer-uppers versus low maintenance
As Shaunt explains, some retirees enjoy projects like fixer-uppers, and they are willing to invest the time and effort into customizing their home. “If retirees have time, they sometimes enjoy smaller renovations such as updating appliances or refreshing indoor and outdoor paint, or larger scale projects like replacing the plumbing infrastructure.”
Other retirees crave simple living, meaning no swimming pools, low-maintenance landscaping, and complimentary solar power systems and free electricity when buying with Reeco. Through Reeco’s Free Residential Solar Program, all home buyers and sellers receive a hassle-free solar power system–installed by our experienced installation team.
We handle everything from assessing the proper size of your solar power system to arranging installation so you can receive free electricity. The average Orange County home buyer saves $1,500 per year on their electricity bill and receive nearly $30,000 worth of value!
If you are a retiree homeowner who wants to explore your home buying/selling options, click here to contact your local Reeco real estate agent today!
We can help you find the right home for you, and provide a complimentary solar power system and free electricity.