A SPECIAL REPORT

ABOUT SENIORS REAL ESTATE SPECIALISTS

“Seniors Real Estate Specialists (SRES) are licensed salespeople or brokers, members in good standing of the National Association of REALTORS®, who have taken the additional hours of training needed to help senior clients make wise decisions when buying, selling or investing in real estate. Many seniors have not invested or sold in years and their issues, requirements and needs are special in order to protect and enhance their equity.

SRES designees belong to the Senior Advantage Real Estate Council (SAREC) which offers the SRES designation nationally to those REALTORS® who have demonstrated the requisite knowledge, experience, insight and expertise to be a Seniors Specialist. The Council also offers its members frequent updates on senior housing issues.”

The REALTOR® who delivered this Report to you is a member of the Senior Advantage Real Estate Council and most likely has earned this prestigious and nationally recognized designation-Seniors Real Estate Specialist (SRES®). For more information about this program call your REALTOR® or email them from the council’s web site at www.seniorsrealestate.com.

ABOUT THE AUTHOR

Tim Corliss is a sixth-generation Californian, who grew up in Los Angeles. A Realtor since 1962, Tim has always been on the cutting edge of real estate. His passion for serving real estate buyers and sellers has gained him tremendous recognition and respect throughout California and the nation. He enjoys the challenges of understanding & solving clients’ problems while fulfilling their needs.

Before beginning his career in real estate, Tim attended Maryknoll Foreign Mission Seminary and was a Franciscan Monk in various California missions for three years. He also attended Santa Monica College and UCLA.

ABOUT THE AUTHOR (cont.)

Tim opened Corliss & Associates REALTORS in 1964. His firm grew to 15 offices with more than 300 agents with divisions in investment property, mortgages, escrows and insurance. When he sold the company to Merrill Lynch in 1982, Tim remained on board as senior vice president of Merrill Lynch Realty until 1987 when he opened Westside Properties.

Tim’s numerous professional designations include the following:

Graduate, Realtors Institute (GRI)

Certified Residential Specialist (CRS)

Certified Residential Broker (CRB)

Certified International Property Specialist (CIPS)

Seniors Real Estate Specialist (SRES).

Tim is a member of the California Association of Real Estate Teachers and a Master Instructor for the California Association of Realtors’ continuing education program. He is also a lecturer and author, and has spoken at UCLA, USC, Pepperdine and Loyola Marymount universities.

Tim has brought innovative leadership to the real estate industry in numerous capacities for nearly 40 years. He is a past president of the Santa Monica, Los Angeles and California Associations of Realtors. He had been honored as “Santa Monica Man of the Year,” one of California's “Five Outstanding Men” and as “Realtor of the Year” by the Santa Monica, Los Angeles and California Realtor organizations.

Tim's extensive experience in representing senior clients for more than 30 years and his vast knowledge of senior issues make him eminently qualified to author this comprehensive report. Tim says his most memorable business accomplishment is that he has personally negotiated more than 5,600 real estate transactions and neither he nor any of his clients has stepped foot inside a court room as a result of any one of those transactions.

INTRODUCTION

“One good real estate investment is worth a lifetime of labor.”

Over the last thirty-nine years, I have heard repeatedly from clients, professional investors, and business people that the purchase of real estate is the single largest investment a person will ever make. If this is true, and I believe it is, then it follows that the sale of that real estate will be the largest single business decision a person will ever have to make. Nowhere is this more apparent than when seniors plan to sell their real estate. Whether you sell for $75,000 or $750,000, that transaction becomes the most meaningful economic decision that you will ever make. Also, it is made at a time in your life when you cannot afford to make any mistakes.

Traveling around North America, I have talked to senior clients and REALTORS® from such diverse communities as Eagle Grove, Iowa; Nashville, Tennessee; Haverhill, Massachusetts; and Seattle, Washington. I was struck by the fact that all seniors buying or selling real estate, in every price range, have very similar situations and questions.

So the examples contained here, both from my personal experiences and from Seniors Real Estate Specialist REALTORS® around the country, reflect questions and concerns that are truly global.

Some Examples of Property Appreciation:

In San Fernando, CA a home purchased for $29,000 in 1965 sold for $170,000 in 1997.

In Seattle, WA a property purchased for $38,000 in 1977 sold for $107,000 in 1998.

In Clearwater, FL a home acquired for $60,000 in 1955 sold for $450,000 in 1998.

In Reno, NV a property acquired in 1970 for $50,000 sold for $220,000 in 1998.

In Fort Worth, TX a duplex acquired for $22,000 in 1980 sold for $94,000 in 1997.

In Brentwood, CA a home purchased for $80,000 in 1969, sold for $1,250,000 in 1996.

Throughout most of the country, substantial appreciation has occurred with properties owned for 20-30 years or more. For most of us, the value of our home or income property is critical to our financial security. When I started marketing real estate in 1962 at the age of 22, most of my clients were 10-15 years older than I was. Now that I’m over 60, most of my clients are preparing to sell, retire, and/or relocate. Most of them are realizing that their property’s equity is needed to maintain their current lifestyle. My experience and training over the last 39+ years has led me to become an expert in learning to save every dollar possible for my clients.

In other words, it’s not what you sell it for but what you get to KEEP that counts.

Experience has proven that proper planning for the eventual sale of your personal residence or investment property, with competent professionals, is absolutely critical. Why? Because you and your family’s short and long term financial security is at risk. In all too many instances, I have witnessed people being trapped into making bad, irreversible real estate and investment decisions. Without the professional input of an experienced Seniors Real Estate Specialist®, a thoroughly prepared plan, and a top financial team, many seniors and their families have lived to regret those snap decisions.

The purpose of this report is to trigger your thought and planning processes. The real estate problems and issues facing us, as seniors, are very different from other property owners. A properly planned real estate strategy can help provide you and your family with a comfortable income for the rest of your life.

Detailed discussions with a Seniors Real Estate Specialist, CPA, and Attorney are critical to your success in any real estate transaction. I must urge you to seek the advice of all of these professionals before making any major decisions about your property.

SENIORS’ 15 MOST FREQUENTLY

ASKED QUESTIONS/CONCERNS

Certain questions have come up repeatedly over the course of numerous planning sessions I have had with prospective senior sellers. The following list summarizes the fifteen most commonly asked questions or concerns voiced over the years. These clients have owned both homes and income property. In some instances, they have lived in one of the income units. In those cases, they were able to treat the unit as their home for real estate tax purposes. I hope that you will find the following examples stimulating and thought provoking in your search for the proper solution to your particular issues and needs. Please remember that adding a “Seniors Specialist” REALTOR along with a CPA, Attorney, and Financial Planner to your support team can greatly relieve your stress.

We have used the “Question and Answer” format to simplify the explanation of these considerations step by step.

1. I’ve already planned my retirement, so all I need

to do now is sell my property. Right?

Retirement planning is very different from the planning required in selling your property. Many people have made economic plans based on retiring at 60 or 65. We plan to live in our home until we either sell our property or pass on. But sometimes circumstances change, and our property must be sold in a relatively short period. Having a pre-planned financial strategy for the sale of your property can make all the difference in the tax ramifications you will face and the peace of mind you deserve.

It’s important to analyze all of the important factors discussed in this report to ensure that you are properly prepared. Even though you may not be planning to sell now, making these preparations will allow you and your family to rest comfortably. Clients who may have to sell need to know exactly what to do to gain the best possible economic outcome. Also, if something happens and you’re unable to perform in the way you want, your property’s equity can still provide for your security.

2. I’m going to have to pay taxes someday, so why

don’t I just get it over with now?

A certain percentage of clients feel like “Eventually we’ll have to pay the piper, so why not do it now?” However, because today’s senior can very easily live to 95 or older, seniors will probably need every dollar of their equity. The money that you would pay on Federal and perhaps your State government* (which is generally at 20% to 30% of the profit/gain that is made on the sale) is money that you need to keep and use to earn interest for as long as you can. Why? Because most of us probably will never be able to earn this amount of money again.

Recent studies have shown that we Americans live longer and enjoy a more active life. We also have a greater need for cash flow to maintain our lifestyle in the last quarter of our life. Proper planning and tax considerations in the sale of your property are critical even though your retirement situation may already be established. Later on we’ll look at a couple of examples of how improper tax planning, or lack of planning, can create horrendous tax consequences.

Most of my clients have realized substantial appreciation (capital gains) on their property and, as responsible citizens, believe that they should pay their fair share of any tax responsibility. The question is when do you pay it? Most of us need the cash flow from the taxable gains and are willing to let our estates worry about paying the taxes. I believe, in most instances, that this is the approach to take. With proper planning, our cash flow is stable, and we save on estate taxes as well.

*With the 1997 Federal tax changes, it is very important that you talk with your CPA, Tax Attorney, and REALTOR to determine your current State capital gains tax requirements.

3. If you specialize in tax-deferred sales, what do

you suggest?

This is a question I’m asked over and over again. The first step in properly answering this question is to analyze, in detail, the acquisition of the property that you’re considering selling.

v When did you acquire it?

v How did you acquire it?

v What are the costs incurred to improve it?

v Do you have written records of those expenditures?

v Is there current financing on it?

v Do you have it in a trust with a will?

v What’s the total value of your estate?

The 1997 Tax Reform Act makes a combination of several tax benefit programs available. All property owners are now allowed to take the $250,000 (single) or $500,000 (married couples) exemption from the sale of their personal residence tax-free. You must have lived there two of the last five years to qualify. This means that at the time of sale any appreciation or profits up to these amounts are yours to keep, invest, or spend for your future and NO taxes are due. If the gain on your property is under the $250,000/$500,000 limits and you have other secure places to invest your equity, then the most prudent plan may be to take the tax-free cash proceeds and reinvest them.

4. We’ve owned a mountain resort property for years

and want to sell it, but the capital gains taxes are

huge. What can you suggest?

There is a solution for your dilemma. The revised tax law will allow you to move into your mountain home and claim it as your primary residence for the next two years. Then you can sell it, and take either $250,000 or $500,000 (depending on whether you’re single or married) from the sale tax-free.

You must actually live there, get your mail there, and prove in an audit (if required) that this is your primary residence. If you own an income property, for example, you can move into the largest unit in the building for two years and use it as your primary residence. A substantial part of the potential taxable profit could be turned into your home deduction and treated as a tax-free sale. While this may be a short-term inconvenience, it could legally save you thousands.

It is important to consult with your Seniors Real Estate Specialist, CPA, and the rest of your financial team. Perhaps a combination of tax-free profits and the installment sale could save you thousands of dollars and give you management-free income for the rest of your life.

If you plan to just place the money from the sale in the bank as a CD (certificate of deposit) or if you are concerned about keeping others from taking or using these funds, you should consider the installment sale. You may obtain a substantially better interest rate return by carrying the First Mortgage/Trust Deed on your property. Ask these questions of your local Seniors Real Estate Specialist, CPA, and your other advisors.

The installment sale is certainly one of the more beneficial provisions that the government has created with the IRS code. It allows deferring the payment of federal taxes in any sale on the equity that is taken back by the Seller as a Trust Deed (Mortgage).

Until a client receives any principal return on the Note (cash received), the client does not have to pay any tax on their equity. If a first or second trust deed (mortgage) is “carried back” on the property being sold, and is payable at “interest only,” then none of the principal is subject to any tax consequence until it’s received (cashed in) by the client. The interest received is taxed as ordinary income. This is called an installment sale. The amount of cash that you do receive as a down payment can be coordinated with the $250,000/$500,000 federal tax exemption to reduce or eliminate your tax payment at time of sale.

If you live in one of the units of an income property and you treat it as your home, you can also coordinate these programs along with a 1031 tax deferred exchange. You could “buy down” into a smaller condominium, retirement home, or property either where you live or anywhere in the country.

As you can see, taking the time to discuss and analyze your exact tax situation prior to the time of sale can save you an enormous amount of money. The money you don’t have to pay in taxes now can be used by you to generate interest income to you until the time you receive cash and have to pay the full tax consequence.

Wait a minute, I’m 65 years old and I can’t wait 30 years for my money. I’m not the bank!

This is one of the many misconceptions of property owners who have owned their real estate for many years. The reality is that a customized tax deferred installment sale can be created for you. You can receive your principal (equity) in as little or as long a time as you personally need. For example, you could create a note for one, three, five, or even ten years or longer. The amortization schedule (the amount of principal and interest received monthly to equally payoff the debt) can be set up for thirty years (which is the standard time used by most savings and loans and banks), but the due date (payment in full date) can be whatever you establish. The length of time can be based on your personal economic situation and financial planning.

Because the “carried back” principal amount is not subject to any federal taxes until received, you will pay taxes only on the interest you receive. What this means is that the percentage of your equity that may have been subject to capital gain taxes is now invested and earning interest daily.

Check the financial section in your local newspaper today for the rates for three and five year certificates of deposit (CDs). At the same time, look at the interest rates that are currently being charged on first trust deeds. You could probably obtain at least 1-2% more interest than from the CDs by “carrying back” paper on an installment sale.

Properly done, you could obtain a higher, secure and controlled return on equity. Best of all, the interest you received would be on both your tax-free equity (per IRS guidelines) and taxable (deferred) dollars. With proper planning and professional advice, you can structure any transaction to be beneficial to you.

5. Isn’t carrying the loan too risky? How would I

know who is a good credit risk?

This is an important question, particularly in today’s market. With the Installment Sale concept, you do act as the lender or the bank and must be very cautious about screening your potential “borrower.”

Proper advance planning will allow you to analyze the credit, financial statements, and any other pertinent information of a prospective purchaser in exactly the same way as a bank. When analyzing these documents, a Seniors Real Estate Specialist, along with your CPA and Attorney, will assist you in evaluating and analyzing the credit worthiness of your particular buyer. Please keep in mind that all of these recommendations are based upon the buyer/investor placing a substantial down payment on the property.

6. What’s the worst thing that could happen to me if

I carried back some of my equity in a trust deed

(mortgage)?

The very worst scenario is that you would have to foreclose on the property. Then you would own it again. The Buyer would forfeit the down payment and other moneys that were paid to you. A specialized service company would do the entire foreclosure process. As horrible as this sounds, less than 3% of all the sellers with installment sales are ever put into this situation, and most of those occur because buyers use very low down payments. Those owners have very little equity to protect. I recommend that a First T.D. (mortgage), and only a First T.D., secure any financing “carried back.”

Your financial plan will require a substantial down payment and detailed credit checking, along with a complete analysis of the buyer’s ability to pay. This puts you, as an investor, in a very favorable position. However, there is always the possibility that changes in the market could occur and a major recession or depression could hit. Then the question would be: “Am I better off having this real estate or having my money in a financial institution?” These questions require time, planning, and discussion to evaluate the tax ramifications of selling for cash versus creating a personal tax deferred program. Your REALTOR, CPA, and attorney are invaluable here.

7. This sounds interesting. Could I keep my money

out at interest for a longer period of time?

This is often asked, and the answer is generally yes. As long as the note is secured by the property, you keep your equity earning interest and tax deferred. The interest rate you receive might have to be flexible, depending on the marketplace and timing. If the interest rate is too high, the buyer might want to refinance and pay off the loan. Many clients who sell their property and become investors realize the continuing tax benefits of keeping their trust deed current and interest rate flexible so that the buyer will have a market rate incentive to make payments. They also discover that they can carry their loan for a specific period of time and then renew it for another specific period. Obviously, all of the installment sales we’re talking about must have the proper protection clauses in them. The attached glossary gives you some of the terms that will help to clarify these concepts. An acceleration clause, notice of default, late charge provisions, and other protections can be placed on all of these instruments giving you the right to control the situation in the event the property might be resold.

8. What if I did an installment sale, and then I needed

cash in an emergency? Can I do this?

The answer to this is YES. You have two or three options. One of the extraordinary benefits of an installment sale is that you can carry back equity with beneficial tax consequences and at the same time have an asset that, in the event of an emergency, is very liquid. A trust deed (mortgage) in an installment sale that has been “seasoned” (meaning that payments have been paid regularly for a period of time) can be borrowed against by you or sold. First, you could sell the note, although you don’t have to. The sales of any note and trust deed does create a tax problem. Most trust deeds and notes are sold at a discounted value from as low as 5% to as much as 25%—sometimes even more. However, borrowing against it could be a very creative way to solve your cash flow needs.

Second, a bank or other financial institution can generally lend you up to 50% or more of the current value of the loan. So for every $100,000 of equity that you “carried back,” you could borrow $50,000 of that amount fairly easily, and often at a very competitive interest rate. The advice of your CPA or tax attorney is needed to determine the proper procedures to meet your needs.

9. I’ve heard that a 1031 exchange can save me money.

How does it work?

People get confused between the tax-deferred exchange and the installment sale. The 1031 exchange is basically designed for trading income property. You would be exchanging your equity in one property for another income producing property. To be tax deferred, it has to be of equal or more value than the property you are selling or trading.

Seniors’ 15 most frequently asked questions

are answered in this Report