Forbes reports Census findings verifying the fact that ten thousand baby boomers are retiring daily. One of the challenges all boomers face as they contemplate retirement is how to save money and minimize taxes and other expenses. It is not unusual for retirees to choose a new home base that is consistent with their goals to minimize taxes and expenses in general.
Understanding the different real estate tax rules and regulations is the first step in successfully managing your tax outlay.
Five Tax Breaks Available To Seniors
There are five different types of tax breaks relative to real estate holdings and transactions that seniors should research and understand to ensure maximum savings.
Tax Exemptions
The challenge that property taxes pose for retirees is that they keep increasing year after year, making it difficult for seniors on a fixed income to budget for and afford. Many states have passed legislation to ease this burden.
Interestingly enough, the government agency responsible for collecting property taxes doesn’t typically inform homeowners about real estate tax exemptions. It is incumbent on seniors to find out about these tax breaks and to apply for them in most cases.
Tax exemptions are designed to reduce home values as a way to reduce taxes. There is not one consistent method for administering tax exemptions. Some states provide a specific percentage reduction on seniors’ home values, while other jurisdictions offer a dollar amount that can be used for lowering home value which effectively lowers their tax bill.
Typically, senior property owners must apply for tax exemptions that vary dramatically based on geographic area, home value and personal homeowner data. Criteria for exemption eligibility usually include a minimum age requirement and an affirmation that the property being reviewed is a primary residence. In some states, homeowners are disqualified from the tax exemption if their income is too high.
Tax Credits
Tax credits are another way that states are adjusting tax bills to accommodate the unique financial needs of retirees. For example, Connecticut provides a $1,250 property tax credit available to eligible married couples. Strict residency, income, and age requirements apply.
Missouri is another state that offers a property tax credit to seniors. While the way this credit is provided differs substantially from the way Connecticut’s tax credits are administered, homeowners receive a maximum credit of $1,100 to be determined by household income and property taxes paid.
Property Tax Deferrals
Property tax referrals offer another relief strategy designed to address the amount of property taxes paid by senior citizens. One of the major benefits of the deferral program offered by the state of Minnesota is that it limits property tax bills to 3% of a senior’s household income. Additionally, the property tax charged never increases for the amount of time the homeowners are in the program.
Seniors from the state of Washington also benefit from property tax deferrals. Eligibility is determined based on age, income and property residency requirements.
Essentially, the Department of Revenue defers property taxes and any special assessments by paying them on the senior resident’s behalf. A lien is then placed on the property for the amount owed.
Property Tax Deductions
Boomers enjoy the same tax deductions from mortgage interest that all U.S. citizens use to minimize taxes. For mortgages under $750,000, all mortgage interest is deductible.
When seniors sell a home earning profits less than $250,000, no tax is owed on the proceeds. For a married couple, the profits must be less than $500,000 to be excluded from taxes.
In situations where the real estate sales proceeds are used to pay for senior living expenses that offer healthcare services, the investment can be tax-deductible as a qualified medical expense under the current tax code.
Property Tax Freeze
The property tax freeze is a strategy that several states use to protect financially vulnerable seniors from rising property tax bills. The way it works is that eligible seniors can have their taxes frozen in place.
Boomers that live in Oklahoma, New Jersey, Rhode Island, Texas, Connecticut, and Tennessee should consider applying for this benefit. State qualification requirements vary. Age and annual income limits apply.
Top Retirement State Destinations and Real Estate Tax Considerations
Below we examine popular retirement locales and the real estate tax strategies that can be employed to lower taxes.
Florida Real Estate Tax Considerations
There are many lifestyle and financial reasons for baby boomers to seriously consider the sunny state of Florida as an attractive retirement option. Many residents can claim property tax exemptions or substantial reductions.
Age, residency, and income eligibility requirements apply. Boomers must be 65 years of age to qualify. Detailed information is available at the county property appraiser’s office. An additional $50,000 homestead exemption is offered through this program. In some cases, a homestead exemption equaling the full assessed value is allowed.
Arizona Real Estate Tax Considerations
This top southwestern retiree paradise is committed to helping low-income seniors with their property tax bill. For seniors 65 and older who are trying to survive on a fixed income, there are two government programs to consider.
The Senior Property Valuation Protection Program operates through county assessors’ offices by essentially freezing home values for taxation purposes. This protects seniors from the stress of trying to pay rising property tax bills on a fixed income.
The Maricopa County Elderly Assistance Fund offers subsidies that often cut property tax bills by as much as 50%. Paperwork must be filed by September 1.
Residency, income, and age eligibility requirements do apply. Kiplinger reports income restriction limits of $37,584 for a single person and $46,980 for a married couple as of 2020 figures. Homeowners must be 65 years of age or older and have lived in the home as a primary residence for a minimum of two years.
Nevada Real Estate Tax Considerations
The great state of Nevada offers seniors a rebate program that refunds a portion of property taxes paid for seniors 65 years of age and older. That is not the only financial benefit of living in Nevada. The good news continues since property taxes are relatively low in Nevada when compared to other locales.
Income, asset and residency requirements apply. For the latest guidelines, consult with the State of Nevada Aging and Disability Services Division. Applications must be turned in by September 30th and can be forwarded to this same government office.
Texas Real Estate Tax Considerations
A majority of seniors in Texas over the age of 65 years old don’t have to pay property taxes. An automatic $25,000 homestead exemption is provided for seniors. Additionally, Texas school districts give away a $10,000 exemption. As if that’s not enough to celebrate, many cities and Texas counties provide an extra $3000 exemption.
All a homeowner has to do is to provide proof of age to claim their exemption. A driver’s license or birth certificate is considered acceptable documentation.
In cases where an older homeowner passes away, the spouse can continue to benefit from the exemption if they are at least 55 years of age and continue to live in the residence.
Strategies for Lowering Taxes when Selling Real Estate
One way many boomers fund retirement is through the liquidation of real estate holdings. A big concern related to this type of decision is the tax implications. Forbes recommends two different strategies that can be used to minimize the tax bill associated with selling real estate. By employing deferred sales trusts or 1031 exchanges, the tax impact is deferred.
1031 Exchange
1031 Exchanges provide a sanctioned way for taxpayers to increase assets and defer real estate capital gain taxes. Based on the Internal Revenue Code, section 1031, a taxpayer is permitted to sell business-use assets and acquire a new investment property without paying taxes on the proceeds.
While this strategy is widely used, there are some restrictions that can make it a less than ideal option. One roadblock for many seniors relates to the new property acquired. It must be similar to the old one being exchanged. Practically speaking, that means a retiree can’t sell a commercial property with plans to pour those proceeds into a single-family home.
Another possible hiccup that can create obstacles when using this strategy is the requirement that the new replacement property be purchased within 180 days of the sale of the old property. While this may not sound like a stumbling block, it can be. Commercial transactions typically take longer to close than residential properties.
Deferred Sales Trust
A deferred sales trust offers seniors an alternative method for accomplishing the same task of liquidating property without incurring a tax debt. Comparatively, this type of transaction allows for more flexibility and less strict rules than a 1031 exchange.
Using a deferred sales trust takes some of the time pressure off so that you can shop for a new property without so much stress to close within 180 days. Boomers can take the sales proceeds earned from a real estate sale and invest it in a liquid investment until an attractive replacement investment is found.
Instead of being limited to a similar type of property for your ultimate reinvestment to avoid the taxman, a deferred sales trust opens up your options to other types of investments. Diversification is possible.
Takeaway
Avoiding taxes is the name of the game for baby boomers seeking to stretch their retirement dollars as far as possible. By learning all of the options available for accomplishing that goal, seniors can accomplish this important financial goal.