Tax Planning 

Tax planning in the broader context of financial planning is all about reducing, postponing, avoiding, or eliminating the tax consequences of a financial activity. You should seek tax-planning advice from a professional tax accountant.

Real estate is a favored asset in the U.S. tax code and offers perhaps one of the few opportunities for house-holds to take advantage of the tax system in their financial planning activities. The favored tax treatment on property is a long list and includes: the mortgage interest deduction, property tax deduction, passive loss treatment, capital gains exclusion, deductibility of certain closing (settlement) costs, and 1031 transfers, to name a few. I recommend that you discuss these issues at length with a professional financial advisor and / or accountant.

Retirement Planning

Obviously, the single most important objective of financial planning is to accumulate sufficient funds to satisfy your financial needs for retirement. The risk of outliving your income is a tremendous motivator for nay long-term financial plan. Retirement planning, in the overall structure of a financial plan, leans heavily on the accumulation of many sources of funds, including your investment portfolio, 401K plans, investment retirement accounts, IRA (Roth and traditional) and other retirement programs, your primary residence, deferred-compensation plans, pension plans, Social Security benefits, and annuities. All of these comprise a household’s retirement portfolio.

The real estate connection to retirement planning is strong and essential. For most households, there is no better source for accumulating retirement funds than your primary residence. By the time a person reaches retirement, their primary residence is usually clear of debt obligations, so that he or she has 100 percent equity in the selling value of the property. Retirees usually trade down upon retirement, taking advantage of the capital gains exclusion provision in the tax code ($250,000 for individuals, $500,000 for married couples). A portion of the funds from the sale of property is used to purchase a retirement home (usually smaller and less expensive than your primary residence). The remaining funds are added to your retirement portfolio.

Ownership of other real estate also plays a major role in retirement planning. Households that own a vacation property need to account for the net value (asset value minus any liabilities) of that property in their retirement portfolio. Households that own rental properties also need to account for the net value of each property, as well as any positive cash flow distributed to the property owner. Here is a typical retirement portfolio, including real estate assets:

Retirement Portfolio
 Investment Portfolio 
  Stocks
  Bonds
  Mutual funds
Retirement Programs
  401(k)
  Pension
  Social Security
  IRA – Traditional
  IRA – Roth
  Annuities
  Other retirement programs
Real Estate
  Primary residence
  Vacation property
  Rental properties
  Other long-term property

In such a retirement portfolio, you need to monitor the cash flow for each investment, the current market value of each investment, and the percentage it makes up of your total retirement portfolio. The composition of your retirement portfolio – that is, the respective portfolio shares of the investment portfolio, retirement plans, and real estate holdings – depends to a large degree on the dollar amount of the retirement portfolio, the number of years until retirement, the target size of your retirement portfolio, and the level of risk you are willing to assume. All of these questions need to be answered by you and your professional financial advisor.

Estate Planning

Estate planning is the part of financial planning that most of us do not like to think about. But it is extremely important to our heirs. Essentially, estate planning is a well-though-out plan to transfer your financial and personal assets to your heirs (e.g., children) while trying to maintain its total realized value. Since there are tax consequences associated with transferring your assets, estate planning is very much linked to tax planning.

There are many complex issues surrounding estate planning that only a professional accountant and/or attorney specializing in estate planning can address. There are many estate issues that involve your real estate holdings, including defining property ownership status, spelling out if a property is encumbered or unencumbered, dealing with “jointly held” clauses, establishing living, testamentary, and revocable and irrevocable trusts, gifting property, and charitable property contributions. These are all issues that you need to discuss with the appropriate estate professionals.

Insurance Planning

If you have not purchased the necessary insurance policies to protect against financial risk, your investment, retirement, tax, and estate planning efforts may be for naught. One devastating loss could wipe out everything you have planned and worked for. Knowing how and when to use insurance removes the uncertainty in a long-term financial plan. To manager financial risk, most households invest in life insurance, health insurance, long-term-care insurance, disability insurance, and property and liability insurance (for auto and home). Selecting the type and amount of insurance coverage is all par to financial planning. The premium costs associated with the menu of insurance options are expenses worth taking in your overall financial planning scheme.

With regard to real estate, there are a host of insurance options for you to consider, including home owner’s insurance, hazard insurance, mortgage insurance, condominium insurance, and flood insurance. Home owner’s insurance is required by the lender, so you have to choice here if you have a mortgage. Hazard insurance may also be required, and given the recent number of hurricanes that have inflicted great harm on so may properties from southern Florida to the Carolinas, certain property owners should take this coverage seriously. Mortgage insurance is not for everyone. Most condominium owners are covered by their condo association insurance policy, but sometimes that policy does not cover all parts of the building. You need to read your condo association’s policy statement carefully before making a decision. And finally, if you are purchasing property near a flood zone, you need to inquire whether the property is located in a federal flood zone. If it is not, you will need to acquire private flood insurance.