What to Consider When Buying a House From a Financial Perspective
COVID has led to a lot of changes. Some may stick, and others we may soon forget. One lifestyle change that has always been important but became exaggerated during the pandemic is where and how we want to live. With remote work options, cost of living projections, and extreme differences in political opinion, we have seen many moving out of the city, many moving back into the city, and some even moving to an entirely new state. If you find yourself in this boat and are considering a move, here is what to consider when buying a house or relocating from a financial perspective.
Things to Consider When Buying a House or Selling a House
Understanding the full scope of the implications on both the sell and buy sides of the housing market and how they impact your plan is pivotal. There may be taxes to consider on the sell-side, and financing options may drive a lot of the planning you do to maximize your resources on the buy-side. Today we are in a very low-interest-rate environment, so think twice before simply moving all your equity to your new home. A careful evaluation of all the options to make a well-informed decision is not something to take lightly. You will also need to adjust your homeowner's insurance and may even want to consider refreshing your life insurance needs. If you moved to a more expensive home, you might want more coverage, and if you moved to a smaller home, you might be able to decrease your coverage and expenses.
Things to Consider Before Buying a House When it Comes to Remodels and Repairs
For those buying a new home, be prepared and plan out the expenses you will incur to make your new house your new home. Costs around remodels and repairs are hardly ever considered, or at least not accurately, when moving into a new place. Often there may be repairs that catch us by surprise or remodeling costs to make it feel more like home. Even things as simple as furniture and artwork can quickly add up. That is why it is essential to budget out these costs and factor them into your decision.
What to Know Before Buying a House When it Comes to Taxes
Remember, taxes can vastly differ in each state. Even if you stay in the same state, you may even see additional property taxes based on your new location. When you move, prepare and consider any state income tax, extra capital gains tax, and even state estate or inheritance taxes as part of your planning.
Consider the Cost of Living Before Buying a House or Relocating
Many of our clients live in the Seattle area, where the cost of living has skyrocketed lately. We see those in our region moving further away from the city or out of state ultimately to find a lower cost of living. If you are moving to a place that may cost less, your dollars may go much further. However, if you move into the city or an area with a higher cost of living, it is crucial to be prepared. Many move to areas with a higher cost of living for career opportunities but may underestimate the costs of living in these areas. Factor in what you can reasonably expect in your desired location and do the homework to make sure you have budgeted for the change in expenses.
Look into the Job Market Before Relocating or Buying a House
Often we move in response to a job opportunity, so many will move in retirement or move because of a new position. Either way, be sure to read over the point above for the cost of living considerations. Additionally, do keep in mind that generally, locations with lower living costs may have a less robust job market. So if something were to fall through with your current job, it might be essential to have a backup plan and understand what options you may have to fall back on just in case.
Have an Emergency Fund in Place Before Buying a Home
Make sure that you have prepared an emergency fund and, even after your move, that you have adequate funds to handle any unexpected costs that may come up. We often see homebuyers spending far too much of their liquid assets on the down payment and initial costs of a new home, leaving them with little to no emergency fund after a move. Not having access to emergency funds is a considerable risk, and I encourage you to be sure you can afford to handle all expenses of moving. It is important to still maintain cash on hand for the unexpected, and if you are not able to, you may not be ready financially for this change.
For example, I recently had a client who moved and liquidated their retirement funds to pay for their expenses. Not only did they take a large chunk from their assets that were set aside expressly for retirement, but they also paid taxes and a penalty because they accessed retirement funds before they were "retirement" age based on the IRS restrictions. This penalty meant that they had to take out nearly double what their actual expenses were to handle the taxes and penalties.
Consider Education Funds Before Buying a House or Moving
Do you have education funds set up in your state? If you are moving states, you may need to consider changing the 529 or other education funding plan you are using to make the most tax laws.
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What You Need to Know About Investment Strategy When Buying a House or Moving
If you move to a state with a state income tax, you may need to adjust your investments as you may find your municipal bond income is now taxable. So, if this is the case, you may want to see other tax-free assets or reposition to get the full tax benefits in your new state.
If that state also has capital gains taxes, it would be wise to accommodate this new additional tax in your strategy, as you may need to experience a higher return to get the same value after taxes. Even those moving from states with income and capital gains taxes to a state without these tax considerations should adjust their portfolio as they will have more options now to minimize taxation and maximize net returns.
Don't Forget to Change Your Address When Moving
Lastly, make sure to update your address on all correspondence and accounts. You can set up mail forwarding from USPS, but this automatic mail forwarding only lasts for six months without additional costs. Outline all institutions where you receive mail from, and be sure to inform them of your address change. If you work with a financial advisor, notify them early on. They should be able to help coordinate the financial aspects of many of these areas.
Moving is considered one of the most stressful changes we experience in our lives. That's why we wanted to make sure to cover what to consider when buying a house or relocating from a financial perspective. There is a lot to consider when buying a home or moving; however, before you make the leap follow this checklist to prepare for this big step in your life!
If you would like to chat about what to consider when buying a house or relocating and how it relates specifically to your tax and financial considerations, don't hesitate to get in touch. Email me today, and we can set up a quick call to help explore all angles of your financial plan!