Can You Fund Your Retirement With Real Estate?

brown and red house near trees
by Advice Chaser
by Advice Chaser

Looking for another option for retirement income than just your 401(k)? Investments of any kind can be used to fund your retirement, albeit not with the same tax benefits as a retirement account. One possibility for retirement savings is real estate. Depending on the way you invest, you might find some tax savings.

brown and red house near trees

Selling Your Family Home

If you have plenty of equity in your house and are looking to downsize, you can realize large gains for your retirement savings. Many families invest in a large house in a good school district when their kids are young. But after they leave the nest, it makes sense to move to a smaller home, a more pleasant climate, or a retirement community. 

During your retirement, your needs change. You no longer need to live near your old workplace. You might not want the extra bedrooms. And as you get older, you might prefer fewer stairs. At that point, a large house ends up being more of a hassle to keep up than it’s worth.

If you sell your primary residence, you don’t have to pay capital gains on the proceeds, up to $250,000 if you’re single and $500,000 if you’re married. That can be a massive cash infusion into your savings, if you have that much equity.

Real Estate as Your Retirement Profession

What if you want to go beyond selling your own house, and want to make a living in real estate? Unfortunately, the tax exemption for selling your home doesn’t apply—you will pay capital gains tax on any money you make this way. But, if you’re a real estate professional, you can write off quite a few of your expenses. 

A real estate professional is someone who works in real estate for at least half their working hours, adding up to at least 750 hours annually. If you don’t want to get that deeply into real estate, this might not be an option that makes sense for you.

Flipping Houses

If you plan to add value to real estate you purchase, house flipping can be a retirement activity that generates useful income. But it takes an initial investment and quite a bit of sweat equity. There’s also risk involved, if you can’t immediately sell the house for the amount you hoped.

Rental Properties

Buying a rental home or apartment building can be a way to generate reliable monthly income. But remember: you only earn that income by providing a service for the people who live there. Are you prepared to come out at all hours and fix leaky faucets? If not, you’ll have to hire a property manager as well. In many places, the law will dictate the standard your housing units have to meet.

Remember also that rental income isn’t a sure thing. This pandemic has shown many real estate owners that their investment is just as risky in a rough economy as any other. Any time you can’t fill a unit, or the tenants can’t make rent, you will lose money on the mortgage, property taxes, paying for the property manager, insurance, and any other expenses. Experts recommend assuming units will be occupied about 90% of the time.

Passive Real Estate Investments

If all of that seems too involved, you can simply buy shares in different types of real estate investment funds. They work the same as any other investment—you buy the shares and receive dividends. When you sell the shares, you will have to pay capital gains tax.

There are a wide array of investment options based on real estate you can include in your retirement portfolio. Some have tax advantages of various kinds. One interesting possibility is opportunity zone investing. Thanks to the 2017 Tax Cuts and Jobs Act, you can earn a number of tax advantages by investing in dilapidated or underprivileged communities. The longer you keep your money invested in an OZ fund, the more of your capital gains tax you can defer and eventually write off.

What Role Does Real Estate Have in Your Retirement?

If any of the options above sound appealing to you, it’s time to start learning how. A financial advisor is the first person you should talk to about how real estate fits into your larger retirement plan. We can connect you with someone knowledgeable about both retirement and real estate. Contact us today to get started!

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