Buying A Retirement Home? Don’t Forget About Taxes!

If you’re looking for a new home in retirement, you might be considering buying as much house as you can afford. This is retirement, after all!

But that’s not always a prudent decision.

One of the key downsides to buying “more house” is the potential for more property tax. It’s one of the less glamorous aspects of home ownership, but it can be an important source of additional costs that eat into your retirement budget – and it can take even savvy home buyers by surprise.

How can you be a property tax strategist? Read on to learn more.

The basics of property tax

Property tax rates are typically levied as a percentage on the assessed value of a home. To determine the value, your tax authority might utilize the purchase price of your home or another formula to arrive at its fair market value (the latter is especially important in cases where you’ve purchased a distressed property, such as short sale or foreclosure).

In other words, as a general rule of thumb, the higher the value of the home, the higher taxes you’ll pay. This is especially important in places like California, where property values tend to be higher – which make tax bills higher, too.

Unfortunately, it can get more complicated.

Depending on where you live, you might be subject to multiple tax authorities, including state, county, city, special district, water and sewage, or school tax authorities. Once you’ve accumulated any and all relevant tax costs, you could be surprised at the bill!

In other words, given the wide range of local tax regimes, it’s a good idea to ask your real estate agent or lender about relevant property taxes in your area.

Paying property tax

As you might already know, home buyers with a mortgage have an escrow account set up with their lender. Each month, you’ll pay part of the estimated property taxes for your home and the lender is responsible for distributing the full payment to your tax authorities.

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Make sure you talk to your lender about how this process will work, as different lenders might handle these operations a little differently. Also be sure to keep track of payments made to ensure that your taxes are being paid on time and in full.

Include property tax in your decision

Of course, property tax is one factor in what is often a long list of considerations – from location and commuting to local schools and amenities, you might have a lot on your mind!

But given that it comes directly out of your pocket, we suggest using property tax as part of the decision-making process, alongside your estimated mortgage payment and other costs.

Our suggestion is to check the potential tax costs of each home you’re seriously considering. This can provide an important comparison point between two otherwise similar properties, and it can also give you an important reality check on the effect of a new home on your retirement income plan.

Important notes on tax reform

The Tax Cuts and Jobs Act of 2017, otherwise known as the recent tax reform, has a few important implications for new home buyers.

When it comes to property taxes, the key change is that you can only deduct up to $10,000 in state and local property and income taxes on your federal tax return. For states with relatively high property values and thus tax bills, this could have a significant impact on your taxes going forward.

A few other important changes:

  • Mortgage interest: For new buyers, you can deduct the cost of interest on mortgages of up to $750,000 for a primary or secondary residence.
  • Home equity loans and lines of credit: The interest on home equity loans and HELOCs is no longer deductible on your federal tax return, though there may be exceptions for significant home improvements. If major renovations are in the cards for you, speak to your accountant to find out if you could be eligible.
  • Capital gains: For single filers, you will be able to exclude $250,000 in capital gains from a home sale if you’ve lived there for 2 out of the previous 5 years. For married couples, the exclusion is $500,000.

Of course, the standard deduction has also been raised, which means that in some situations itemized deductions – including state and local property taxes – might not make sense anyway.

If you’re shopping for a new home, we recommend speaking to a financial advisor and/or your accountant to run the numbers for your situation: what you can afford, how your new home can help or hinder your financial goals, and what you can expect from a tax perspective.

Happy home shopping!

Does your home fit in with your retirement strategy?

If you’re shopping for a home as you plan for retirement, you might be up to your elbows in other financial decisions as well. To help you through the process, download our free guide. It’ll help you tackle the key risk factors and planning issues you might be facing and start creating a personal financial plan for the future.

Click here to download Your Guide today!

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You Home is a Tax Haven

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Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement planning coaches, we can give you a review and make suggestions based on your retirement objectives.

Important Disclosures

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. United Planners does not render tax advice.

Securities and advisory services offered through United Planners Financial Services, member FINRA, SIPC. Pasquale Vitucci, CA Insurance Lic. # 0758212, is an Endorsed Agent of Vitucci & Associates Insurance Services CA Insurance Lic. # 0I06319. Vitucci & Associates Insurance Services and United Planners are separate and unrelated companies.
This page contains links to third-party company websites. By selecting a link, you will be leaving our website and launching a new browser window. These links are provided for informational purposes only and should not be viewed as an endorsement, sponsorship, solicitation or other affiliation with respect to any third parties. We are not making any recommendations or providing any advice on securities in particular or investments in general. Neither Vitucci & Associates nor United Planners Financial Services have reviewed the content of, and are not responsible for, the information or the results of the third-party websites.

Further Reading

Tax reform and homeowners: https://www.cnbc.com/2017/12/20/here-are-the-finalize.html and http://money.cnn.com/2017/12/17/real_estate/tax-bill-mortgage-property-tax-deductions/index.html

Property taxes introduction: https://www.credit.com/loans/mortgage-questions/property-taxes-and-your-mortgage/

Property tax mistakes: https://www.bankrate.com/finance/mortgages/property-taxes-trip-up-naive-homebuyers-1.aspx