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parents selling rental unit in retirement- where to put money

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  • parents selling rental unit in retirement- where to put money


    My parents are not the most financially literate, but my mom is trying to learn a little more.   My dad is 80, and his mental health is starting to decline, and my mom is 64, retiring next year. They outright own their home and a rental unit in a HCOL area.  I am trying to convince them to move to a LCOL area (coincidentally closer to their grandkids and my siblings), and am also concerned that my dad's future will include a nursing home stay in the next few years. Currently they are living off of my dad's SS, my mom's low income wage and the rental income right now. When my mom retires she will have a very small pension to draw from also, but they never invested in any 401ks, iras, etc.  My mom recently approached me about selling the rental unit they own, but I'm not sure what her best options are as she has friends telling her to wait to sell and then to use the sale to buy a new rental property in whatever area they plan on moving to next year in order to avoid taxes.  Here are the options my mom asked me about:

    1- sell and buy the new investment property as stated above- while this would help them save on taxes, I don't like this option- my dad was always the one fixing most things in their current rental, and no longer has the capacity to do so consistently.  My mom does not drive and knows nothing about fixing apartments. I feel if they do this they would need to hire a property manager, which negates the  tax benefit. Also, they wont know the current rental market in whichever new town they move to.  For the same reasons I don't like a reverse mortgage as an option either which another one of my mom's friend's suggested. Plus if my father does need a nursing home in the next few years, wont this affect medicare paying for it (5 year look back, assets, etc)?

    2- transfer the current rental unit to me or my siblings.  None of us want this. We want our parents to use the sale of this apt to fund their retirement while my dad can still enjoy it.

    3- sell the rental unit, give me money to invest for them in the market.  Since they have never invested in the market, I am afraid of this option for 2 reasons: a- if a bear market happens in the very near future, they wont have the funds to withstand it since they missed out on investing all these years and b- I dont know enough yet about investing while in retirement, especially starting in retirement.  I'll have to read more of Hatton's blog.

    4- sell the rental unit, and use the money in a CD ladder to fund retirement

    5- sell and use the money for my mom to buy an annuity, at least guaranteeing them a monthly floor for income.


    Is anyone else in a similar situation? What did you do for your parents?  I wish my mom had come to me a little earlier to better plan this stage of their lives, but my parents were never really open talking about money issues, and would cut me off in the past if I tried bringing it up.

  • #2
    A little more info would be helpful.  What ballpark money could be raised from selling the rental unit and the hcol house.  Moving to a low cost area near extended family sounds wise.  If you really think your dad will soon be in a nursing home they could consider renting a place instead of buying in the new area.  A SPIA might be a good option.  Your mom will be able to get either social security spousal benefit or benefits on her own earning record.  How much money do they need. I went through some of this with my Dad who died at 92.  He was totally uncomfortable with putting any money in stocks.  He spent about 10 years in assisted living due to insulin dependent diabetes and macular degeneration.


    • #3
      Are you in a hurry to get them settled? If not, can they sell the current house and move into the rental for 2 years? Sell both tax free and move to the LCOL area.

      Also, are your siblings up for the responsibility that comes w this plan?


      • #4
        My mom says she absolutely refuses to move twice, so moving into the rental for two years is not an option to her despite its benefits.  They live in ny, and the plan would be to move to Florida or South Carolina.  I know houses on zillow in the area (same size bedrooms etc) are listed between 500-700,000, but not sure why the range is so high.  The rental would probably sell for 290--400,000, again just basing this on zillow comps.




        • #5
          So your parents have $790-1.1mill.  They will also have 2 social security checks.  Do you have an idea about how much they spend?


          • #6
            Your mom will likely be around another 30 years or so - that's a long time. Laddered CD's would eat her lunch due to inflation. You need an idea of what they need to live on, subtract out guaranteed income (SS and pension) and the difference is what they need annually from investments. They need to keep 2 years of spending needs liquid, next 3 years in high quality corporate bonds or laddered CDs, and the rest invested in an appropriately diversified equity mutual fund portfolio. With all due respect, I do not think this is a DIY project - a fee-only financial planner who can put a plan in place and incorporate the investment/liquidity needs to fund the plan would be worth the cost.

            I also think you should read Simple Wealth, Inevitable Wealth before you do anything - it will give you some much-needed perspective about safe investing and the purpose of equities for long-term needs. It does recommend the AUM model, which you can just overlook as it's not central to the book. The value of SWIW is in behavioral management advice along with proper portfolio construction and management.

            If your dad goes into a nursing home and they do not have LTCI, you should seriously consider a SPIA.
            Financial planning, investment management and CPA services for physicians, dentists, and medical professionals | 270-247-6087


            • #7

              wont this affect medicare paying for it (5 year look back, assets, etc)?
              Click to expand...

              I believe you meant to say 'medicaid' not medicare. Medicare does not cover nursing home stays. Medicaid is a safety net for people without assets (poor) who end up in a nursing home. I would not want my parents in a medicaid nursing home. Your parents have plenty of assets therefore they will have to pay for their nursing home stay. They should be fine.

              If they sell their primary residence, they will be able to keep $500k free from capital gains taxes, plus their cost basis. I don't believe you are looking at any tax bill there (or maybe a very minor one)

              Yes - What is their SS income and what are their expenses if they move? If their SS income is $30k and their expenses are $35k, it's a pretty easy gap to fill.

              Given the age and the health of your mother though, I would be worried about the next 30 years. I don't think it's a reasonable financial plan to have no investments that can keep up with inflation (that may or may not happen) but a lot will happen in the next 30 years that none of us can predict. My mother is of similar age and has zero investments as well (withdrew all of them in March 2009). I have been unsuccessful in convincing her that she needs investments in retirement (whether it's a rental property or stocks)

              Good luck in trying to steer this ship.


              • #8
                Thank you all for replying last year- just to update the situation- the rental sold for about 300,000, which would clear a little over 200,000 after taxes etc- My mom is hellbent on trying to avoid paying the capital gains on it, so she wants to try buying a rental in Florida to do a 1031 exchange based on what her "accoutant (i think its just the real estate broker)" told her, even though my dad will likely need an assisted living facility or home care in the next 12-15 months. I think my mom is definitely letting the "tax tail wag the dog".  Everything is basically now in my mom's name and my dad has no significant assets in his name.  Their primary home is now probably worth 600,000.  My dad's social security check is about 2000/month.  My mom's SS and NYC pension can bring in another 800/month. Her supposed plan is in 2 years to sell their primary home and then  move into the Florida "rental" that she wants to buy in the next couple of months.

                I have heavily discouraged this course of action but its falling on deaf ears. I also think my dad will need care before my mom's plan to sell their home.  I keep trying to get her to talk to an elder lawyer, especially because I predict the need for a nursing home for my dad in the future, and its unclear if they will stay up in NY or move to Florida. I would prefer if they also sold the house that's worth 600,000, move into a small ranch in  a LCOL/low tax state, invest what's left over and pay for my dad's care with the growth/dividends/etc. Or get an SPIA for my mom to provide a nice income floor with the excess going towards my dad's care when he needs it.  I'm guessing home care, nursing homes, memory care and assisted living facilities are cheaper in the south than in NY/NJ, but I haven't checked yet.  I do have two questions that I hope can be answered by someone here in order to maybe give my mom one final convincing argument to not do her plan

                1- If she does what she wants and buys a rental to do the 1031, hires a property manager (in a state shes never lived in and knows nothing about the local market) to do the 1031 exchange, but my dad needs medicaid before she moves into it (if she ever does), how does this affect my dad's medicaid eligibility? Is the rental considered an asset subject to the 126420 max? Or is the monthly rent considered income towards the spousal max income?

                2- How does medicaid consider SPIA as assets or income?  Again my preference would be selling the house they live in and having them move to a cheap LCOL place and pay for good care out of pocket with the proceeds but I foresee my mom not being disciplined enough financially for that and medicaid assistance required at some point.




                • #9
                  I am in the cheaper part of NYS and I have a patient moving to Georgia for memory care because it is much more affordable.
                  Also family dynamics are involved with a loud mouthed son in Georgia who never actually took care of his parent. This is according to the kids in my area of course.


                  • #10
                    Medicaid is going to be a mess. You have a rental property, home, and income. Both the home and rental property AT A MINIMUM will be pledged toward any nursing home care.

                    I think you will be require to liquidate the rental property. Due to the timeframe (5 year look back) they are in a tight spot. Without knowing, where they are moving, that makes it worse. Medicaid eligibility is BY STATE. The real issue is keeping assets for your Mom. The house (with a spouse) is normally exempt. Any cash or investments you have a problem.

                    Legal helps "sucks" when you don't know the state. Financial planning "sucks" when "Mom" puts up barriers. That LTC is a "bomb" that seems to be dropping and will wipe out most if not all and leave her dependent on the checks. Why? Even with a house, that cash for the homeowners insurance, property taxes and burial are gone! Find out where she wants to live for 30 years. Two years "temporary" can wipe everything out. Once she knows that, get an Elder Lay attorney of a for fee financial planner that deals with these situations to come up with a plan to achieve that 30 plan. Asset protection plans (for Mom's sake) can be possible. Without a destination, its likely to be a train wreck. Determine the "End Game" and then find a way to conserve the assets, all of them you can for you mom 30 years.