Selling the family home and renting in retirement can be an appealing idea: running a household becomes more convenient and bank accounts benefit from the generation of capital.
However, these are only a few of the factors that play into what is a huge decision for most clients. Emotions, habit and the desire to stay in a known neighbourhood are common reasons that many retired clients choose to stay in their homes.
Barb Garbens, president of B L Garbens Associates Inc., notes that home ownership still is viewed as a core value by many Canadians. The home also is a nest egg they can sell or borrow against if more income is needed. As a result, many Canadians much prefer to downsize by buying a smaller house or condo.
That said, Garbens’ clients include one couple who chose to rent. They planned to travel a lot and wanted to be able to lock up and leave. They’ve been renting for around 10 years now and are happy with the choice.
Another of Garbens’ clients, who is around 70 years old, was worried that she couldn’t afford to stay in her home. However, financial projections didn’t show enough savings to make selling worthwhile, so the woman is staying in her home for now.
Paul Marion, senior vice president at Canaccord Genuity Group Inc. in Vancouver, says that the only time renting vs home ownership comes up in his practice is if a client has little choice. Marion cites one client whose husband left a lot of debt; the only way to clear it was to sell the house and rent.
Other factors to be considered include the type of rental accommodation your client can afford. Adrian Mastracci, discretionary portfolio manager with KCM Wealth Management Inc. in Vancouver, thinks that renting often is a “good bargain.” The exceptions are the red-hot real estate markets in Vancouver and Toronto.
For clients with high-value homes in cities like these, where values tend to keep increasing over the long run, the loss of the principal residence capital gains tax exemption is a consideration.
However, selling a home also tends to generate large amounts of capital that can be invested for long term growth and stability. Tony Salgado, manager, tax and estate planning, with Investors Group Inc. in Mississauga Ont., notes that for many clients, the biggest chunk of assets that they will ever have is generated by the sale of their family home. A detailed financial plan – outlining rental expenses and how to invest the sale proceeds to generate the resulting required cash flow – is essential.
Most of Garbens’ clients have preferred to downsize to a smaller home if finances look tight. However, she cautions, such a move has to be a significant step down to be worthwhile.
“If you have a $1.5-million home and downsize to a $750,000 condo, you have a sizable addition to your invested assets and it’s worth it,” Garbens says. “But it’s not worth downsizing to net $100,000.”
Clients who travel a lot and have a house rather than a condo may be interested in renting; otherwise, being absent for long periods means that they would have to arrange for house maintenance while away. Many insurers, for instance, require that homes be checked frequently, while repair issues can arise suddenly.
Clients with a second property, such as a cottage at which they spend a considerable amount of time, may be attracted to the idea of renting. Doing so cuts down significantly on the amount of maintenance they must perform, a factor that becomes weightier as clients age.
And as long as the second property is located in Canada, your client who rents can designate it as their primary residence and benefit from the associated capital gains exemption.
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