Downsizing - Buy Or Rent Next?
It's a question that many aging homeowners – and some younger ones, too –wrestle with. When you decide to scale back on the size and expense of the family home, is it wiser to buy again or just rent another place to live?
"It all depends," says Chartered Accountant Albert Yu, a sales representative with Re/Max Hallmark Realty Ltd. in Toronto. "Stage-of-life, finances and many other factors need to be considered when deciding to either buy or rent a home."
Here are some points that Yu suggests to his clients when they are considering a substantial change in their living space, and/or their lifestyle.
Decide in good health – The worst time to make important life and money decisions is when poor health makes them urgent or necessary. Choosing a home should be a financial and lifestyle choice, Yu says. It should reflect your own preferences, whether or not you live alone, your proximity to children and other family, access to the amenities you want, and so forth.
Use the opportunity to plan your future – A substantive change in circumstances, regardless of the reason, is a good opportunity to revisit your goals and the strategies for achieving them. Use this as a signal to meet with your Chartered Accountant to understand how downsizing your home may affect your future finances and estate plan.
Be honest about your needs – People with vacation homes or those who spend winters in warmer climates may not really need to own any longer. Renting offers flexibility, less upkeep and often-better security and access to amenities - a better choice for a lot of people, especially in later years.
Set a timeline – If you plan to be in your next home for less than about three years, purchasing may not be worthwhile. Buying, selling and moving a house is both stressful and expensive. Factor in legal costs, land transfer taxes and realtor commissions, and Yu says the cost of a typical move can easily top 10 per cent of the purchase price.
Don’t believe everything you see on TV – Don’t let those ads for reverse mortgages sway you. Yu calls them the “option of last resort” and says they target seniors who are irrationally attached to their homes. Investigate other, better ways to raise cash if you need it. A home equity line of credit (HELOC), for instance, can provide you with funds temporarily and allow you to retain the title to your home. If you need cash outright and your resources are limited, Yu suggests you seriously consider selling your home and finding a rental. Your Chartered Accountant can help you evaluate the options.
Avoid unnecessary taxes – The sale of a residence will be tax free if you designate that home as your principal residence for the years you own it. If you have more than one residence, then you need to decide which one gets designated as the principal residence. Gains on the sale of a home not designated will be taxable. Let the professionals help you weigh the alternatives.
Live within your means – If you’re considering selling your home because of the expense, Yu says it’s generally better to buy something more affordable than rent for any period of time. Get help making a budget or financial plan, and limit your mortgage payment to a maximum of 25 per cent of your take-home pay.
However, there may be occasions when investing the proceeds from the sale of your house and renting something else will make sense for you and your lifestyle.
Take all the government help you can get – While not much incentive for seniors moving from larger to smaller homes, downsizing can sometimes provide some tax relief. If that next, smaller home is also at least 40 kilometres closer to either work or school, you can claim a moving allowance when you file your tax return.
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