Special Feature

Special Report on Retirement 2017

In this special feature: keeping clients calm; downsizing the family home; getting the most from spousal RRSPs and much more from the Mid-November 2017 issue of Investment Executive.

By Dwarka Lakhan | Mid-November 2017

Clients seeking to access the value held in their homes during retirement often are faced with a difficult choice: should they sell and downsize, or sell and rent?

"It's a decision they have to think about intelligently," says Prem Malik, financial advisor and chartered professional accountant with Queensbury Securities Inc. in Toronto. "Although downsizing to a smaller house can be a viable choice, it works well only if clients move to a location where houses are much cheaper."

Another factor in successful downsizing: there must be a big gap between the price of a client's house and the one he or she is planning to buy, says Aiman Dally, chartered professional accountant and president of Copia Financial Solutions Inc. in Oakville, Ont.

"If a client is downsizing from a $500,000 home to one that costs around $400,000, that might not make sense," he says, "because he or she would not realize a significant gain after fees and commissions are paid."

Here's a look at how the gain on the sale of a $500,000 house and the purchase of a $400,000 house would be reduced: expenses on the sale would include real estate commissions (usually about 5%, or $25,000), the land transfer tax (a little more than 1%; in this case, $5,775) and legal and closing fees of at least $1,100. So, the client would realize a maximum gain $68,125 by selling a home worth $500,000 and downsizing to a home worth $400,000.

That's before moving expenses and law society surcharges and disbursements, which can be as high as $2,500, according to Harry Debi, broker of record with Futurehome Realty Services Inc. in Vaughan, Ont.

Whether downsizing to a smaller home or acquiring a condominium, Debi suggests, a good rule of thumb is that the home being acquired must have a value that is at least 30% lower than the value of the existing home.

A smaller home may result in lower property taxes, utility bills and maintenance costs, which are 2%-4% of the value of the home annually, depending on the age of the home, Dally notes.

Clients who downsize and choose to buy a condo must be aware that in addition to property taxes, they must pay monthly condo fees, which are 45¢-75¢ per square foot, depending on the location, Debi says. Fees for luxury condos can be $1 or more per square foot.

Clients who buy a new home as part of their plan should be reminded that they must pay GST (or HST in provinces that have HST, such as Ontario).

Emotions are a big factor in downsizing or moving to a new location, says Debi, who has been in the real estate business for almost 30 years: "It might sound appealing, but a lot of older people find that moving out of the community in which they have lived for many years or into a residence with much smaller space is hard."

Selling the house and moving into a rented house or apartment is another option. Again, this strategy works best when moving into a real estate market in which property values are significantly lower.

Consider the case of one client who sold his house in the suburbs of Toronto, where he had lived for 19 years, and moved into rental housing in Collingwood, Ont., a resort community 140 kilometres north of the city on Georgian Bay.

An "empty nester," this client says he chose to move out of the city because downsizing within the city would not produce a significant financial gain. Moving away from the city affords "a better quality of life," he says, with "less stress, less pollution and less congestion."

This client bought his house in 1998 for $525,000. He added $175,000 in upgrades before selling last year for $1.8 million. After expenses such as commissions, land transfer taxes and legal fees totalling $125,000, his net gain was $975,000. He now rents a four-bedroom house in Collingwood - with swimming pool, tennis court and lake access - for $2,300 per month.

This client assumes that at a minimum rate of return of 4% on his gain, he will receive $39,017 in annual income. He will also save approximately $40,000 in annual maintenance expenses and $10,000 in property taxes.

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