By Nick Shea, MBA
Whether you’re a Realtor, property owner, house flipper, or landlord—buying, selling, and renting real estate is often a lucrative industry. While there is great income potential in real estate, there is risk and a learning curve to achieving success.
You’ve taken on real estate as a career or chosen it for its semi-passive income qualities. While generating income is the goal, educating yourself on the industry, time involved, and tax implications is key to making the most of your investments.
Mixing Real Estate and Retirement
Standard long-term rentals and vacation rentals are great ways to build your retirement income. But it’s important to remember it’s not 100% passive. It’s important to think about your desired retirement lifestyle before jumping in.
Will you live near your rental property? Will you be away for part of the year? How about added travels, even if only for a few days at a time?
Will you be available for the occasional “the furnace is out” call? If not, you may need to consider hiring a property manager. Turning over properties, leasing, renter communication—it’s time to start thinking about who will handle the work that comes with your real estate once you’re retired.
Also, consider how dependent you’ll be on your real estate. Building a cash reserve is often advised when relying on investments to cover everyday expenses. A property may sit empty or require large expenses. Cover these expenses with cash to ensure your real estate doesn’t derail your retirement plans.
Investing in Real Estate for Retirement
For some, investing in real estate and retirement planning are nearly synonymous. But is that where your plan ends? You may need to step back and think about how much you’re pouring into real estate compared to how your other retirement accounts are looking.
This is where proper retirement planning becomes a factor. Many choose for their real estate earnings to complement their retirement savings. No matter how stable a real estate investment appears today, a diversified portfolio can help offset unforeseen risks.
Opening an IRA is a great retirement savings mechanism for any professional. You may choose to fund an IRA with real estate earnings. Working with a financial advisor can provide concrete guidance when it comes to fund allocation between the stock market and real estate.
When it comes to buying real estate, a mortgage will require extra planning. Although you may think your assets are enough to qualify you for a mortgage, most lenders highly value a steady income.
While you will collect Social Security during retirement, this income stream is often not enough to qualify for a mortgage. It’s often necessary to pre-plan to pull funds from a retirement account for at least two months prior to purchasing a property. For this reason, you may consider solidifying any last mortgages prior to retirement.
Selling Properties for Retirement Income in NH
At some point, you’ll want to sell your real estate. While the property has hopefully provided income while under your ownership, properly timing the sale should be accounted for.
If you sell your real estate within a year of purchasing it, New Hampshire is the place to be. Where many states would collect income tax on the earnings, New Hampshire does not have a state income tax.(1) Another tax benefit of New Hampshire is no estate tax—good news for those hoping to pass on property to a beneficiary after their passing.
For properties you’ve held longer, capital gains taxes come into play. Most can expect a 15% capital gains tax if their taxable income falls under $496,600 for a married couple filing jointly. The rate jumps to 20% if above the 15% threshold.(2)
Avoiding Capital Gains Taxes
Consider a 1031 exchange to push out paying capital gains taxes. A 1031 exchange is essentially selling one real estate investment and using the money to turn around and buy another like-kind property to defer capital gains taxes.
While simple on the surface, there are details you need to be aware of:
- Both properties must be investment properties or used for business.
- What does like-kind property mean? Generally speaking, this means one income-generating property for another. Gains from farmland you rented out as pasture could be swapped for an apartment complex. Both are real property used for investment/business purposes.(3)
- A qualified intermediary is required to conduct the transaction. This is a third party that holds the earnings from the first sale and sees through the transaction of purchasing the new property. Tax accountants and title companies are often able to provide qualified intermediary references.
There is also a timeline to be aware of:
- The exchange starts the day your property is sold.
- From the date of sale, you have 45 days to identify a replacement property.
- To complete the exchange and avoid capital gains tax, you must have purchased and taken over ownership of a new property by day 180.
Stick to the rules and approximately 6-month timeline, and you will successfully defer paying a capital gains tax associated with the sale of your property. Meeting with a tax professional is highly advised when planning the sale of any real estate investment.
Create a Retirement Plan Based Around Your Real Estate
While real estate is a great way to fund retirement, creating a plan that incorporates your goals and retirement timeline can be tricky. Leaning on the expertise of a financial advisor can bring clarity and direction to your real estate endeavors. Our advisors at Catalyst Investment Management would love to partner with you and, when necessary, introduce you to specialists to combine efforts to tackle these complex situations.
Nick Shea is founder and financial advisor at Catalyst Investment Management, an independent firm dedicated to providing personalized financial advice and planning. Over 40 years ago, Nick started reading The Wall Street Journal, building his own portfolios, and developing a passion for the financial world. He turned this interest into a career, working for many years at the former Dean Witter, now Morgan Stanley, and Charles Schwab, where he worked as an investment consultant, branch manager, and product developer. As a learning and development director, Nick created and delivered the branch management leadership program for the entire branch network. He has a bachelor’s degree in political science from Occidental College and an MBA from the University of Notre Dame. Nick specializes in serving entrepreneurs and helping retirees navigate through the complexities of the Medicare system. He is passionate about helping his clients mitigate the risks that can derail their financial goals. He is known for championing his clients’ dreams and striving to help them find the financial peace of mind they long for.