In our last column we talked about CRA cracking down more on individuals who are non-compliant with respect to the principal residence deduction. Certainly individuals who have frequently bought and sold homes under the principal residence deduction will have to think twice and be prepared to be audited.
This article is really about the individuals who are contemplating a change in their life. Health and life events are often the two trigger points that have people thinking about whether to sell or not. It can certainly be an emotional decision when it comes to that time. Selling your home when you have control on timing when it is sold is always better than the alternative.
For our entire lives we have been focused on making prudent financial decisions and doing things that increase our net worth. There comes a point where you shouldn’t always do something that is the best financially. If we only made decisions based on financial reasons you would never retire, you would work seven days a week, work longer days, and never take a vacation. Throughout our working lives most people try to create a reasonable work-life balance. In retirement I try to get clients to focus on the life part and fulfilling the things that are important to them.
Selling a principal residence could translate to a foolish move for someone looking at it only through net worth spectacles. I encourage clients to take off those spectacles and focus on what they truly want out of retirement and life. At the peak of Maslow’s hierarchy of needs is self-actualization where people come to find a meaning to life that is important to them. I think at this peak of self-actualization, many find that financial items and having to own a house, are not as important as they once were.
About ten years ago I remember having meetings with two different couples. Let us talk about the first couple, Mr. and Mrs. Brown who had just retired. One of the first things they did after retiring was focus on uncluttering their lives. They got rid of the stuff they didn’t need, and then they listed their house and sold it. They then proceeded to sell both cars. Shortly thereafter they came into my office and gave me a cheque for their total life savings. Mrs. Brown had prepared a budget and we mapped out a plan to transfer a monthly amount from their investment account to their bank account. They walk everywhere and are extremely healthy. They like to travel and enjoy keeping their life as stress free as possible. If any appliances break in their apartment it is not their problem, they just call the landlord. Our meetings are focused on their hobbies and where they are going on their next trip.
I met another couple ten years ago, Mr. and Mrs. Wilson. They had also just retired. They had accumulated a significant net worth through a combination of financial investments and they owned eight rental properties (including some buildings with four and six units). At that time I thought they would have had the best of retirements based on their net worth. The rental properties seem to always have things that need to get repaired or tenants moving out. When I hear all the stories it almost sounds like they are stressed and not really retired. Every year their net worth goes up. Every year they get older, Mr. Wilson is now 75 years old and Mrs. Wilson is 72. In the past I have talked to them about starting to sell the properties, to simplify their life and get the most out of retirement. They are still wearing net worth spectacles and have not slowed their life down enough to get to the self-actualization stage.
My recommendation to clients has normally been to stay in their home as long as they can, even if this involves modifying their house and hiring help. This is assuming they have their health and the financial resources to fund this while still achieving their other goals. Even in cases when financial resources do not force an individual to sell a house, the most likely outcome is that the house will be sold at a later stage in life and the proceeds used to fund assisted living arrangements.
Many people are house rich and cash poor. From my experience clients have two choices. Option one is they can have a relatively stressful retirement trying to stretch a few dollars of savings over many years. With this option you will likely leave a large estate. Option two is selling the house and using the lifelong accumulation of wealth to make the most out of your retirement. Although this option results in a smaller estate, you’re more likely to reach the self-actualization stage.
Kevin Greenard, CPA CA FMA CFP CIM is a Portfolio Manager and Director, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week in the TC. Call 250.389.2138. greenardgroup.com
This is for information purposes only. It is recommended that individuals consult with their financial advisor before acting on any information contained in this article. The opinions stated are those of the author and not necessarily those of Scotia Capital Inc. or The Bank of Nova Scotia. ScotiaMcLeod is a division of Scotia Capital Inc., Member Canadian Investor Protection Fund.