Meet Cherie Butler, Our Senior Real Estate Specialist
Cherie, being a "young senior" herself, has gone through specialized training and truly understands the needs, concerns, and more importantly the opportunities our senior population is being faced with today. "I really don't like being called a senior, laughs Cherie, but the fact of the matter is, I am one! I love the changes that have come about in the past few years that provide help and relief to our "young seniors", "junior seniors" and "senior seniors". Changes such as the 1997 tax law which now allows the seller to keep their profits instead of paying capital gains tax. We are also seeing an increase in 1031 tax-free exchanges, reverse annuity mortgages and downsizing to smaller, maintenance free homes. Hopefully the boomerang kids are gone for good this time!

For more information on the Senior Real Estate Specialist Designation, SRES, click here. Less than ½ of 1% of the real estate professionals in the world have obtained this coveted designation provided by the National Association of Realtors®. Please visit this page often as we will be adding pertinent information for our seniors as it becomes available, or contact Cherie today at (859) 533-3511 or via This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

15 Most Commonly Asked Questions / Concerns
Mr. and Mrs. Lexie 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 15 most commonly asked questions or concerns voiced over the years. These clients have owned both homes and income property where they lived in one of the income units. If you do, treat the unit as your home for real estate tax purposes. I hope that you will find these 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. Q. I've already planned my retirement so all I need to do now is sell my property. Right?

A. Retirement planning is certainly different than the planning required in selling your property. Many of us have made economic plans based on retiring at 60 of 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. Q. I'm going to have to pay taxes someday so why don't I just get it over with now?

A. A certain percentage of clients feel that, "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, you will probably need every dollar of your equity. The money that you would pay on Federal and perhaps your *State government (which is generally at least 20% to over 30% of the, profit/gain that is made on the sale) is money that you need to keep in use and earning 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 illustrate a couple of examples of how improper tax -planning or lack of any planning can create horrendous tax consequences.

Most Seniors 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.

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

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

1. When did you acquire it?

2. How did you acquire it?

3. What are the costs incurred to improve it?

4. Do you have written records of those expenditures?

5. Is there current financing on it?

6. Do you have it in a trust with a will?

7. What's the total value of your estate?

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

The 1997 Tax Reform Act makes a combination of several tax benefit programs available. All property owners are now allowed to take the $500,000 (married couples) or $250,000 (single) exemption from the sale of our PERSONAL residence tax-free. You must have lived there 2 of the last 5 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. Q. We've owned a mountain resort property for years and want to sell it. The capital gains taxes are huge. What can you suggest?

A. 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 2 years. Then you can sell it and take either $250/500,000 (depending 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 was your primary residence. If you own an income property, for example, you can move into the largest unit in the building for 2 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.

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 30 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 a I- 2% better interest rate than the CD's by "carrying back" paper on an installment sale.

Properly done you could obtain a high, 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. Q. Isn't carrying the loan too risky? How would I know who is a good credit risk?

A. 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 Specialist Realtor®, 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 in the property.

6. Q. What's the worst thing that could happen to me if I carried back some of my equity in a trust deed (mortgage)?

A. The very worst scenario that could happen 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. The entire foreclosure process would be done by a Specialized service company. 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 they 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 secure 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. Q. This sounds interesting. Could I keep my money out at interest for a longer period of time?

A. 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 you off. 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 continue 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 protective data 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. Q. If l did an installment sale and then I needed cash in an emergency? Can I do this?

A. 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" (seasoning means that payments have been paid regularly for a period of time) can be borrowed against by you or sold, either all or part of the note.

First, you could sell the note, although you don't have to. The sale 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% too as much as 25%-sometimes even more. However, borrowing against it could be a very creative way to solve your cash flow needs.

Second, generally 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. Q. I've heard that a 1031 exchange can save me money. How does it work?

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

If you live in one of your units or decide to convert your residential property into an investment property, an exchange could have strong tax saving possibilities. You could then depreciate the property and create other tax benefits. A 1031 exchange, however, is totally different from the installment sale that I previously discussed. Again, proper analysis of your individual situation by an experienced Realtor® along with an accountant and tax attorney can help you to determine the value of a 1031 exchange. It doesn't work for everybody, but for certain clients, it is the only way and provides an absolutely exciting opportunity. The delayed exchange allows you to find a Buyer for your property, place your equity with a qualified accommodator and then buy/trade for another property across town or across the country and be totally tax deferred. You could still have the income producing benefits of all your equity.

10. Q. Why don't l just refinance the property and live off the money?

A. Refinancing any piece of property can provide a cash flow and will allow you to have money to use. The difficulty of refinancing and living off the cash flow is that once that cash flow is gone, the property becomes a negative equity situation. We'll talk about negative equity a bit later. Refinancing is not a benefit to most people.

There are reverse annuity mortgages that allow you to borrow against your equity by creating a loan that is paid out to you in monthly installments. Or you could receive the cash all at once. It does not yet have the confidence of many seniors. One problem seems to be that often there are very high costs deducted from the loan right at the start. Please contact your local Reverse Mortgage Consultant for a free interview before signing any documents.

11. Q. Isn't there a way that I could sell my property and stay here until I'm ready to move.

A. Most people who ask that question are generally talking about what's called a Life Estate. It's a technique where people can sell their property to someone else, create a tax savings situation in some instances, and still reserve the right to live in the property for a specific period of time or until they die. However, with property that has appreciated it is difficult to find a buyer who will go along with this for any length of time because generally it's not economically feasible.

Also you do lose control of your property. However, Life Estates can be very effective if you own an income property; for example, a 6-8 unit building, where you are occupying one unit. That unit could be left in your control. as a Life Estate for you. You could sell the property, get away from the management responsibilities, and still have a place to live for as long as needed. Again, a personal review with your Seniors Realtor®, Attorney and your CPA are critical.

12. Q. How does the 1997 federal tax occlusion work?

A. Currently IRC Code 121 allows any homeowner who is selling his/her/their principal residence, an excluded $250,000/500,000 federal tax exemption from the gain on the sale. $250,000 is for a single person; $500,000 is for a couple. This exclusion is a powerful program that has been developed by the government giving most of us, particularly Seniors, an opportunity to put all or most of the profits from the sale of our primary residence into our pocket tax-free. To qualify you must have owned the property and used it as your principal residence for two of the last five years. The effective date of this exclusion was May 7, 1997 and all sales closed after this date are subject to the new laws.

13. Q. There aren't any more capital gains, right?

A. This question is often asked because of the ever-changing federal and state tax situations. The answer is that since the 1930's there has always been capital gains and subsequent tax. How the amount is arrived at, and at what rate of tax, has been subject to change. Capital gain is the difference between the basis in your property and what you'll sell it for, less your selling expenses. The 1997 Federal Tax reversions set capital gains tax rate for most property owners at 20% of the gross profit after expenses on property held for 18 months or longer. If this is your personal residence, $250,000/500,000 of gain is excluded from tax if you occupied it for 2 of the last 5 years. Of course, upon the sale of your principal residence or income units you do have to apply the federal tax exclusions before calculating the amount of any capital gains.

If you have lived in income property over the years and treated it as your home, it is very important to determine your original basis. Why? Because the amount subject to capital gains is generally the amount of profit between your original basis and the sales price of your current property, less sales expenses and exemptions.

For Example:

1. A single client sold a home in California for $450,000 with a basis of $60,000. Even with the new tax laws the original purchase price (basis) is still important. The actual amount subject to capital gain is the difference between the net sales price (after the basis and all selling fees are deducted) and the income tax exclusions ($250,000/$500,000). In this case the expenses of $41,500, basis of $60,000 plus the exclusion of $250,000 (single person) were deducted leaving $98,500 subject to capital gains.

2. However, clients in Bozeman, Montana sold a 4-plex (they lived in one unit) and needed to know their basis in the property to determine the amount of their taxable gain. Basis is the acquisition cost of the property plus any capital improvements such as roof, plumbing and such and is subtracted from the sale of that property along with the sale of expenses.


Generally speaking, the difference between the gross acquisition price and the net sale price less your exemption represents capital gains and is taxable.

All real property is generally subject to a maximum federal capital gains tax rate plus whatever your local State tax requirements call for. In fact, in some instances, the sale today, when added to other sources of income, might move you into a higher capital gains tax bracket. Capital gains tax has not gone away.

As you can see, it is imperative, when planning the sale of your property, that you consult with a Seniors Realtor®, CPA and Tax Attorney who are aware of all the capital gains tax consequences.

14. Q. How can I get my equity to work for me and not against me?

A. This is probably the most critical of all the questions. Because of the appreciation of real estate over the last 20+ years, most of us who have owned property since then, or longer, have substantial equity today. Maximizing this equity, (getting its highest and best use) and converting it to a working asset for you, is the exact reason for this report. Clients have often said, I own my property free and clear so it costs me almost nothing to live here." This isn't true and here an example of how your equity can actually work against you instead of for you:

A property in Florida was acquired for $50,000, It is free and clear and now worth $300,000. The property taxes are $3,000.00 per year. The insurance, utilities, etc. are somewhere in the area of $200.00 per month. On the surface $450.00 per month is a pretty reasonable living expense, although you must add in the ongoing maintenance and upkeep. However, to be totally accurate you must add in the income producing value of your $300,000 equity at some reasonable interest rates.

Example:

A. $300,000 @ 8%= $24,000.00 annually or $2,000.00 per month. Add the $450 and your actual cost to live there is S2,450 00 per month + maintenance.

B. $300,000 @ 9%=$27,000.00 annually or $2,250.00 per month. Add the $450 and your actual cost to live there is $2,700.00,per month + maintenance.

The real cost to live in any free and clear (unencumbered) property must include a reasonable rate of return of the equity involved plus the actual hard expenses (monthly out of pocket and maintenance) which is always substantially higher than you think.

The answer, then, creates some new questions:
Are you getting the best economic and emotional return on your total equity in today's market, or do I need to re-evaluate and plan for tomorrow?

Is the "real" cost of living in the property a profitable use of equity?

Or could you live somewhere else more reasonably and use the extra cash for other needs?

Would you get a better value for those dollars by converting to another use?

Do you have enough cash flow to enjoy the balance of your life?

15. Q. How can I be sure that I'm doing the right thing and using my equity to its optimum?

A. I used to tell my clients that if they were over 50 and their children were in college, they were either very wealthy or really foolish to still be living in a single family home. I realize that this could be taken as a harsh statement, but as I have grown older, I believe it to be absolutely true. What if they took their equity and purchased a duplex, triplex or fourplex with an owner's unit? It could be in the same neighborhood that they're living now, or out in the country, or in a golf community. My point is that, with this kind of residential income property, your equity continues to work for you and your family still has a place to call home.

It is still appreciating, generating a positive cash flow, and providing security in our senior years. This is just one of many ideas to think about. It's never too late to start using all out assets to create a positive cash flow.

The purpose for the planning, discussion, and analysis we've talked about in this Special Report are all brought to fruition here. Only by taking the time to sit down with your Seniors Specialist Realtor®, CPA and Attorney, can you come to a proper, logical decision of what is "-right for vote" Some actual case studies now might help you to put this Special Report and its' data you into perspective.

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How to contact Cherie, Shirley, Kitty & Linda:
Toll Free Phone: 1-866-come2ky (1-866-266-3259)
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Keller Williams Realty Bluegrass 2424 Harrodsburg Rd. Suite 101 Lexington, Kentucky 40503