Here is an interview I did with a local CPA

Annie Baker: Have you ever thought about using the equity in your home as part of your retirement plan? Living here in the Bay Area, a lot of people are living in their golden goose egg. They’ve built up so much equity if you’ve owned your house 10, 20, 30 plus years you probably have a lot. So, that’s what we’re going to talk about today. How to use your home equity as part of your retirement plan. Stay tuned. 

I’m with a local expert, David Koehler. Dave has his own CPA firm, Koehler and Associates in beautiful San Jose on the Alameda. He’s an excellent resource for any kind of tax implications, and he’s going to help guide us today helping us with using your equity is a part of your retirement plan. So Dave tell us, what are some of the things you think would be helpful for people to keep in mind if they’re using kind of their equity as part of their retirement plan?

David Koehler: It’s an exciting time when you’re facing retirement. But many people have not had a chance to really slow down and plan it as much as they should. Hopefully, they have a lot of accumulated appreciation in their house, and the cost of living is so daunting here, and the traffic’s so bad, a lot of people look at different options when they retire. There are challenges that we face that you want to protect your legacy, you want a secure retirement, your cash flow. So, what I offer my clients and what I look to advise anybody, in fact, is take a holistic view, take a step back and analyze your option. If you’re like many people, your house equity has outpaced maybe some of your retirement savings. Social security is a security blanket. But yet what you’re faced with is how you can replace your income. And a lot of times you start looking at unlocking the equity in your house. What are smart ways to do that? Hopefully, you have not borrowed excessively during your accumulation phase, and you have a lot of equity in the space. And what we really are looking at, about three different options, main options.

David Koehler: One option is you could sell and flee California and find a retirement home out of state, or in different parts of the state to have less expense. And therefore you would end up likely buying a house that costs less, and therefore unlocks some of the equity that remains from the gain and the sale of your house. The disadvantage obviously of that is if you’re married, you do get a $500,000 exclusion on the gain, but 250 if you’re not married. But you may still be faced with a very large tax bill if you bought the house at three or 400,000 and suddenly it’s worth 1.6 million. You’re still spacing a fairly large tax gain like six to 800,000. Tax rates could be as high as 34% long term capital gain. That adds up quickly. And then you’ve lost that equity forever, and your kids have lost that equity. Because you may be hoping to pass on your legacy. So, what are some of the other options? One thing I did want to mention is the 60 solution?

Annie Baker: Yeah.

David Koehler: Do you want to explain that real quick?

Annie Baker: So in certain counties in the state of California, you can actually keep your tax base. So if you’re here in Santa Clara County, you’ve owned your home for over 20 years, you have a low tax base because you bought the property so low, you can move to these specific counties and bring that tax base. So you keep a low property tax. But it does not include all of California. So be careful. Reach out to either one of us if you want to know which counties are included.

David Koehler: Perfect. Thank you. And what you do save as the property taxes, by the way, this does not have anything to do with the capital gain.

Annie Baker: Yes.

David Koehler: What I want to bring up too is, don’t just sell your house and be surprised by your capital gain. Make sure you talk to your tax professional or someone to give you advice in that area. So a lot of people say, well I really don’t want to sell and move because that becomes such a final decision. Other things you need to look at if you’re really committed to staying in the area, but your retirement savings are limited, if you’re over 62 a reverse mortgage is an expensive option, but it is an option that is valid for certain people who really want to remain in Berry because they’re right down the street from their kids, or they just don’t want to live anywhere else. But if you really want to stay in your house, that makes sense.

Annie Baker: There is another option we’ve talked about is, let’s say you do you have adult children that want to move back to the area, or who have been renting and you have a lot that’s large enough to add a separate building in the back, they’re called ADU, an accessory dwelling unit, you can build like a one-bedroom guest house on your property, have your adult children move into your house, and have them pay you the rent. Well, you might be able to help them out, give them lower rent than what they would normally be paying, but it would also supplement your retirement income and you’d be with your family.

David Koehler: There is a valid reason to use a home equity line, to borrow the money to build an ADU unit.

Annie Baker: Yeah.

David Koehler: So, I could get behind that strategy. I think that’s a good one. The other strategy is a kind of, it’s in between the two of just selling or just saying there forever. Kind of a transition. And what we’re looking at is, you could rent out a couple of rooms, like an Airbnb, or like she brought up to the children. If you start renting the house then you have mixed-use. And if you have mixed-use you qualify potentially for a partial 1031 exchange. Or if you fully rent it out, even better you’d qualify for a complete 1031 exchange. To explain what 1031 is for those who don’t know it is a part of the tax code that says if you take a piece of real property, an investment property, which is like a rental property, and you can exchange it any other investment property and not pay any capital gains.

David Koehler: So if you bought it for 100,000 and it’s worth a million, you’ve got $900,000 of gain, and you can go sell your house here if it was used as a rental, and you’d get $1 million and you could then buy a place in Arizona and turn that into the rental, or Utah, or anywhere else and you pay no gain on that sale. You have to keep using it as a rental property, but after a couple of years if your mood changes or you decide you want to retire to Arizona or something you could then move into that place, make it your primary residence, and therefore you’ve basically evaded through proper structuring the immediate capital gains tax.

Annie Baker: Dave, I think it’s pretty clear there is no one option that’s the best. Everybody’s situation is different. So, I highly encourage you to talk to Dave about these different scenarios. Sit down, have a conversation, have him look at everything. He does financial planning and CPA tax work. Again, there are options, renting, staying and renting in your own house with an ADU, doing reverse mortgages, selling. Please reach out to one of us to learn more about this. We want to help protect your biggest asset, probably for your retirement, and help you be able to enjoy your retirement and not be stressed.

David Koehler: And that is the best part of my job is helping people enjoy their lives, enjoy their retirement. I hope I spoke clearly on some of the options available to you, and my team and I are ready to assist if you ever need some help. And one thing I wanted to stress too is, find your team of professionals and make sure they’re working together because that has a lot of value.

Annie Baker: Definitely.

David Koehler: That’s why I really appreciated Annie having me come speak on this topic.

Annie Baker: Yes, teamwork is everything in these situations. Dave, I really appreciate you taking this time. Again, talk to either one of us. All our contact information is here. Again, I’m Annie Baker, realtor here in Silicon Valley. Dave Kohler is a financial planner and CPA in Silicon Valley. We would love to help you. So until next time, have a great one.

David Koehler: Thank you.