By Samantha R. Webster, CFP®

In 2017, a story was published in Global News of a Canadian couple who were separated for the first Christmas in over seven decades for health reasons. Although initially, they were residing in the same long-term care facility, the husband was moved to a memory care facility due to his progressive dementia. The story itself was heartbreaking, but it highlighted a real concern that many couples have about the uncertainty of aging and how that may affect their life together. Most couples hope to enjoy their golden years with the company of their partner, but a sudden change in health could alter that path.

When it comes to long term care planning in today’s world, there are many paths seniors can choose. 

One popular choice is a continued care retirement community (CCRC). This allows the majority of caregiving needs to be met in one community. CCRCs offer independent living, assisted living, and nursing home care in one campus. If greater caregiving needs are required, these communities can typically accommodate without having to move an individual to a separate facility. However, there may still be special considerations that you and your partner may want to discuss when comparing different CCRCs to determine if it is the right fit for both parties. Some questions you may want to discuss include:

How seamlessly can care be increased or decreased for one or both partners, if required? 

It is likely that at some point in retirement, your care needs may increase. It is also very possible that one partner’s needs may increase more than the others. A 2017 AARP study found that 52% of people turning age 65 or older will need some type of long-term care. If one partner has a sudden change in health that renders them unable to perform everyday tasks or in need of medical supervision, it could put considerable strain on the other partner to provide adequate assistance. Care facilities can often take the pressure off of the caregiving spouse. However, some facilities may only accommodate a certain level of care in certain areas and may end up having to relocate a spouse to a different building or unit that can meet these needs. This could pose a problem if the other spouse can live independently. It could be a difficult adjustment for some if different levels of care require couples to be shifted around quite a bit, or separated, even within the same community. When looking at retirement communities, partners may want to consider how the facility handles increasing care needs, and how one spouse’s care needs may impact the living arrangement at the facility.  

Does the culture and programs offered at the facility suit both of your lifestyles? 

Your emotional and social needs are just as important as physical care, and making sure you and your partner find fulfillment in these areas may be important to your long-term happiness in the community. In the past, there has been a stigma around senior living as a place where people just go to quietly pass away. Over the last few decades, the mind-set on aging has taken on a more holistic view. Studies have shown that mental and emotional factors can play just as big a role in the aging process as physical and genetic determinants. Being restricted to a community where you feel “out of the loop” or not adequately stimulated could lead to social withdrawal and possibly depression. This could, in turn, lead to premature aging and limit your overall quality of life. Your retirement years should hopefully be a time where you discover an enriching second chapter of your life. Your partner and you may want to sit down and list specific areas of interest and amenities you want your community to include.  

What does your space and living environment need to contain to feel like “home”? 

Stepping into your space and having it feel like “home” is a very specific feeling that differs for every person. Of course, every space becomes more familiar once it is filled with your items and effects, but other factors may affect your ability to familiarize with the space. Moving into a CCRC can be a big adjustment for many couples, especially if you lived in your previous home for years. Some communities may only have limited unit sizes, which could mean downsizing. After years together in your home, you most likely developed an unconscious comfort and familiarity with certain elements of the space. It’s possible that you and your partner have not formally discussed your ideas on what makes you feel “at home” in years. This may be the perfect time to have that discussion since this will be an adjustment for both of you. While considering communities, you may want to take note of your current home and what you find most comforting in your current space. This could help guide your selection.

Moving at any age can be a big adjustment, but in our advanced years, other factors such as limited mobility and declining health conditions may make the process even more difficult. Everyone ages differently, and you and your partner’s needs may differ as you age together. The growing market for CCRCs may offer more options to choose from, but it can also require a bit of research to discover the right fit for both of you. Your advisor could assist you in comparing your options and provide insight into the structure and long-term viability of different retirement communities.

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

Sources:

Judith G. Alexander-Wasley MBA. CFP®

On the morning of August 14th, 2019, headlines were streaming on major news sites that the 10-year Treasury yield had fallen below the two-year note prompting the inversion of the yield curve.  The media went a step further declaring the inversion as an imminent indicator of a recession. Subsequently, the Dow Jones Industrial Average sank by 800 points; the broader S&P 500 Index was down 86 points, and the NASDAQ was lower by 242 points.  With memories of the market turbulence of last December still fresh in many people’s minds, the prognostication of a looming recession was not welcomed news for investors. While a yield curve inversion has occurred more than once in the recent past, this does not mean it’s time to metaphorically “run for the hills.”  To understand the yield curve inversion, and why some economists use it as a predictive model for future recessions, it could be helpful to initially understand how the bond market functions in relation to current and future economic conditions.        

Bonds represent the debt of companies or the U.S. Government. Investors lend the money to companies or the Government, and in exchange, receive an interest “coupon” (the annual interest rate paid on a bond, expressed as a percentage of face value) at predetermined intervals until the principal is returned to the lender on its maturity date. The maturity is typically determined when the bond is issued and can range from 1 day to 100 years; although, the majority of maturities span between 1-30 years.  Since a bond’s term can span several years, they are often separated into 3 categories: short-, medium-, and long-term. Generally, bonds are considered a more conservative investment than stocks and they typically provide a steady stream of income.

The bond market is often viewed by economists as a predictor of overall economic conditions. When the economy is robust and consumer sentiment is positive, investors are likely to pull away from the slower growth of long-term bonds in favor of stocks, which may carry more risk but may generate greater returns over time. When investors view the economy less favorably, many will consider repositioning their holdings from stocks into bonds to lessen volatility. This scenario creates a supply-demand challenge as the greater demand for bonds will drive up the price of bonds and lower the yield, or return the investor reaps. The increased propensity of investors to secure bonds can foster the yield curve inversion. 

A “healthy” yield curve, or one where short-term interest rates are lower than long-term, historically indicates a growing or expanding economy. In contrast, an “inverted” yield, or one where short-term rates are greater than long-term, are viewed by many as an indicator of a slowing economy or economic recession.

The Federal Reserve Bank’s Federal Open Market Committee (FOMC) typically raises rates when they see the economy as thriving to curb inflation. Their rate hikes last year may have led to some slowing in the market. Potential concerns by many investors that the ongoing trade dispute with China will bring about a recession may have led to greater stock “sell-offs” and increased purchasing of long-term bonds, prompting higher prices and lower yields.

In this past month, August 2019, the yield has inverted twice so that 2-year Treasury bonds were trading at a higher yield than 10-year bonds. These inversions only happened briefly, but many are concerned that the inversion is a signal of an oncoming recession. Over the last 50 years, a yield inversion has sometimes preceded a recession. However, it is important to note that in the past an inversion typically did not signal an immediate recession. Most occurred approximately 22-24 months following the inversion. Furthermore, the inversion does not measure the length or severity of a recession.

It could be helpful to remember that the bond market, in general, is driven by investor’s expectations for future economic growth. The trades of stocks and bonds are made by people. While different computational technologies may assist, the financial decisions of people are generally the main driving factor of the economy. People may be motivated to buy and sell based on strong emotions, such as fear. Uneasy political conditions and the possible long-term consequences of a trade war could lead investors, and companies, to favor less risky financial options, such as bonds.

By many measures, the U.S. economy is considered to be relatively healthy:  with low unemployment rates, rising wages, and steady GDP growth. Predictive models, such as the inverted bond yield, often only measure one piece of the entire economy. While it could be helpful to heed possible warning signals, it may also be beneficial to consider various other factors which could affect economic conditions.  

If you do have any questions regarding the financial landscape, it may be a good time to reach out to your advisor to discuss your current financial picture to make sure it is in line with your vision for the future.    

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

Sources

By Jill Ciccarelli Rapps, CFP®

We’re nearing the end of summer, and for many recent high school graduates, this means they will be setting off on their first adventure as independent adults. If you’re a parent of a child leaving for school, this time could cause a mix of emotions and may include concern over the safety and well-being of your now adult-aged child. The distance and inability to keep a watchful eye over them could leave many parents wishing they had a mechanism to give them constant updates. Though it is most likely not advisable to place a tracking device on your child, it could be beneficial to take certain preliminary steps to secure your ability to assist your child in the event of an emergency. Certain documents could allow you to step in to provide critical support even if your child has surpassed eighteen years of age. Some documents you may want to consider creating with your child may include: 

A Healthcare Proxy

The idea of facing life or death circumstances will most likely seem outlandish to the majority of young, healthy, recent high school graduates. However, ask someone who has been in such a situation, and most will tell you the same thing: “you never expect it to happen until it does.” The unhealthy habits many college students form to stay on top of their increased workload can often create a perfect storm for health issues to arise. It could be helpful to establish a medical power of attorney, otherwise known as a healthcare proxy. This document allows an appointed individual to make medical decisions on your behalf to ensure that your medical treatment instructions are carried out if you become incapacitated and can no longer communicate your wishes. While this document is typically associated with seniors and those with terminal illnesses, nearly anyone over 18 years of age can appoint a healthcare agent. Without this document, it may be up to the discretion of the doctor or healthcare provider what treatment your child receives, even if this goes against your child’s wishes.

HIPPA Authorization Form

It is nerve-racking for parents to imagine their child being involved in an emergency and even more frightening to imagine trying to obtain information on their current status and getting denied access. With the continued rise in out of state college attendance, it’s not unusual for many parents to find themselves already at a disadvantage when trying to stay up-to-date on the well-being of their child. To add another barrier to this situation, if your adult child is hospitalized and unconscious, and has not authorized you as a recipient of their healthcare information, the hospital will most likely be unable to provide you with any updates on their condition. HIPPA Laws, or the Health Insurance Portability and Accountability Act of 1996, safeguard who can access an adult’s private healthcare data. There is a great benefit to the law in protecting your information from strangers, but for a concerned parent trying to ensure the safety of their child, it could be burdensome. A HIPAA authorization that has been signed by your child and names you as an authorized party could prevent this roadblock. Out-of-state students may have to fill out the form for both their home and school states. If your child is reluctant to sign this form in fear that it would permit you to see every detail of their health records, it does allow them to specify which details remain private.

Power of Attorney

Many students may believe that once they turn eighteen, a magical switch is flipped and suddenly they fully have all the knowledge and wisdom of an adult. While some may show a great deal of maturity, there is still a good chance they have not dealt with the majority of aspects involved in adult life. However, their legal status as an adult could prevent you from assisting with various financial and legal affairs. Many parents may want to step in at times to help ease the transition into independence. A Power of Attorney (POA) could give a parent the ability to conduct business on behalf of their child to help with matters such as housing agreements, managing financial accounts, and signing legal documents. There are different types of POAs and some grant more authority than others. You may want to discuss with your attorney which type is best for your family.

As a parent, you likely wish you could put an invisible shield around your child to protect them at all times. It’s not easy watching one of your life’s greatest treasures leave the nest, but it may bring some solace to discuss early on their ideas and beliefs regarding financial and healthcare matters. This way, if an emergency were to arise, it could relieve some of the pressure from the decisions you may have to make. Your advisor may be able to assist you with how to open lines of communication in these areas. 

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

By Lynn Ferraina, Advisor

Everyone has a different memory of the day they received their very first paycheck along with the excitement that came from having that first taste of financial freedom. It’s a feeling most of us hope to feel throughout our life, but if you were not exposed to lessons on financial responsibility when you were young, it may be a more tumultuous road to get that feeling again. That is why it could be helpful to teach your children and grandchildren as early as possible how to intelligently manage their money. While it’s a skill nearly everyone at any age can learn, studies have shown that children who don’t receive financial education are more likely to have lower credit scores and face financial difficulties later in life. The concern of many parents and grandparents is often “at what age and how do I begin teaching these concepts?” The following, broken down by age group, are skills which can be taught at each age, and creative ways to incorporate these lessons into your children and grandchildren’s lives.

Toddlers

(Ages 2-4)

Toddlers are just starting to develop their verbal and non-verbal abilities, so understanding the finer points of fiscal responsibility may be a bit of a stretch. This can be a good age to begin introducing the concept of money, how it can be exchanged to purchase items, and how it has to be earned. Pew Research found that most adult’s attitudes toward money were actually formed by the time they were seven. Toddlers tend to be sensory learners, so incorporating physical touch and feel into the learning process could enhance their comprehension.

As you begin to teach counting, you could use coins to demonstrate. You could then integrate this practice into playtime by setting up a pretend “storefront” and have children exchange toys or empty food containers for money. To help them understand the concept of earning, you might have them help with a small task such as putting away a toy in order to “earn” another toy or game. At this age, the goal is to ideally instill a positive association with money, so as they age they feel a greater comfort discussing more advanced financial concepts.

Children

(Ages 5-12)

At this age, kids can begin to understand the true value of goods and services, the time and effort it takes to earn money, and how saving money can allow them to save up for larger purchases. When grocery shopping, you could have them help you count out the correct change, and have them hand over the money. As you shop you can point out the prices of different items, and compare them. Showing an example of how candy they may want could equal the cost of two boxes of cereal, or that milk costs a dollar seventy-six cents more than a carton of eggs. Having a general understanding of the cost of goods can then build toward creating a budget.     

When a child is throwing a tantrum in front of a display of shiny new action figures, it can be enticing to just give in to their whims and buy them the toy. This may not have the desired benefit of teaching one of life’s important lessons: “If you’re not willing to put in the work, you won’t be able to reap the reward”. Toys cost money which requires working to earn that money. You could have extra chores they can perform with different values placed on the tasks. In the professional world, jobs which require a greater level of experience, education, or specialization typically earn more. The same principles may apply with chores. Once the child has their goal (the toy) you can help them budget how many chores will be required to earn it.

If the toys they want are more expensive, it may take more than a days’ worth of chores to pay for it. This is where you can introduce savings. We can’t always buy everything we want the moment we want it. An often important step in comprehensive financial planning is determining long term and short term financial goals and then tailoring your spending and savings habits to them. Children could learn this lesson by having separate jars for immediate spending and savings. Seeing a jar filled with money that they worked and saved for provides a sense of accomplishment and may lead to more conscientious financial habits in the future.

Teenagers

(Ages 13-18)

It is your last few years to really instill positive habits before they reach adulthood. When you’re a child, you don’t face the same financial consequences that you do as an adult. If you’re not careful in your financial decision making, you may find yourself facing some long-term difficulties. A part-time job could help introduce this lesson. In the workplace, your actions and behaviors can have real repercussions. How you manage the time, effort, and tasks your given can result in either gaining a paycheck or losing the job.

If your teenager has a paycheck from their part-time job, you could open a savings account so they can get a head start on savings for their future. It will also introduce them to the concept of having their money make more money through interest. Most savings accounts earn low-risk, low-return interest, which could be a great place to start potentially growing their wealth. If they start depositing into the account early enough, they might even have a decent nest egg once they graduate high school. 

This may also be a good time to introduce them to investing. Your teen may not have enough in their account to invest in a real company’s stock or a fund, but they could virtually “invest” in an online stock market game. Various online market simulation games exist, many of which are free. Even if the money their investing is not real, it can still teach them how they may want to manage and invest their money in the future.

While there may not be a perfect uniformed method to teach financial literacy that works the same for every child, generally speaking, beginning lessons as early as possible tends to lead to better results. The lessons that come from learning how to be financially responsible can also teach kids how to make positive choices in other areas of their life as well. At some point, almost everyone wishes that they had learned more about a subject or life skill when they were younger. However, it could potentially benefit your children in their future endeavors if money management is not something they wish they had learned more about. As you and your children explore the financial landscape together, you may want to discuss with your advisor your financial goals and desires for their future. Together you could work to foster your legacy.    

Sources

Benefits of Financial Education:

Financial Attitudes:

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

By Carol L. Girvin, Advisor

It’s a memory many of us can relate too. That moment as a child, walking into your room, to find someone with your diary open, discovering your deepest thoughts and secrets. It’s disturbing to have your security and privacy ripped away in a single moment. In today’s tech-driven world, computers, cellphones, and smart devices have taken the place of pen-to-paper diaries. Like a diary, they hold our deepest and most sensitive information. In the wrong hands, that information could be used in unwanted ways, potentially costing you a great deal of time and money to recover. It is for this reason that we urge you to take certain precautions with your online accounts. Simple actions and habits when using a computer or smart device could help to keep your online “diary” locked away.

Online security experts, such as Norton and McAfee Internet Security, recommend several steps that used together could help protect your online information. 

1.    If you are no longer using an account, close it.

If you’ve been using online services for several years now, there is a good chance you’ve made more than one online account which you no longer use.  Having these unused accounts could leave your information easily exposed to online hackers. In 2016 the account information from over 360 million users on the social media website, MySpace, was put up for sale on an illegal trading website. Many of these accounts had not been accessed for nearly a decade, but the information could still be used to impersonate users. If you are done with the account, delete or disable it.

2.    Stay aware of your surroundings, on and offline.

Would you be able to remember an identifying detail about the person who stood behind you in line at the grocery store while you flipped through your phone? Could you recall the last time you checked the privacy settings on your Facebook page? Remaining complacent in regards to your safety and privacy could put your information in jeopardy. When in a public place, remain cautious of where and how you use the internet. For example, guard your screens the way you would your debit card; don’t use public Wi-Fi networks (including hotels), and only visit trusted sites which have a URL starting with “https”. The majority of online criminals prey on people when they have their guard down.

3.    Update your passwords.

We’ve mentioned in one of our previous articles the importance of updating passwords every 90 days. Along with continually updating passwords, it’s important that those passwords are unique and different for every account. In the past, it was recommended to use a string of random letters, numbers, and symbols with both upper and lowercase characters. New recommendations suggest instead using random sentences or phrases that you will be able to recall. A strong passphrase is typically a sentence that is at least 12 characters long. Keeping different passwords for every site can also prevent hackers from gaining access to multiple accounts if one is breached.  

4.    Post with caution.

It has never been easier to impersonate someone than in today’s world of constant online oversharing. Cybercriminals know this. Common security questions such as a pet’s name or a child’s birthday are often available on people’s social media pages. A great deal of private information is shared accidentally in posts or pictures. It has become a common tactic for home invaders to scope out a strike by perusing social media pages to see when families have left for a trip so they can gain easy access. Even a harmless photo could reveal your location because of geotagging. Most smartphones and apps will embed geographic location into photos, so when you share them, people can see when and where they were taken. This could give criminals a clear picture and timeline of your habits, making you an easier target. It could be a good idea to check the privacy settings on your phone and in your social media profiles to make sure automatic geotagging is turned off.

5.    Don’t ignore the security update.

It can be an inconvenience when you’re trying to use your phone or computer, and suddenly your operating system gives you a notification that it needs to update. Many of us delay these updates, but this could create a security risk. Software developers face an ongoing war with hackers. No system is perfect; they know this and are constantly running checks on systems to find any holes. These holes can weaken the security of your system and allow hackers to gain access to part or all of your device. In some cases, hackers have been able to gain access to phone and computer cameras remotely to spy on users. Those updates allow developers to release “patches” to close those security holes and keep hackers at bay.

Online security shouldn’t keep you up at night with worry, but remaining complacent could put you at risk. The internet is a great resource and can allow you to connect with friends and family across the globe, but if you wait until someone has already gained access to your accounts, it may already be too late. Being proactive rather than reactive often yields better results. It can take a cyber-criminal a minute to gain access but could take you potentially months or even years to regain lost accounts. As you venture into the online sphere, remember to stay vigilant and aware. It could be your best defense.

Sources:

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

Our firm considers your family’s online safety and security to be of the utmost importance. To assist you in safeguarding your online experience we are providing you with actions recommended by the FTC (Federal Trade Commission) in the event you experience a data breach. Depending on the type of breach, only a portion of the below info may be exposed. It may still be beneficial to follow all listed steps as a precaution.

To Help Secure Your Credit File:

• Enroll in credit reporting from the three major credit bureaus listed below (or obtain a free credit report at annualcreditreport.com).

Equifax.com/personal/credit-report-services

1-800-685-1111

Experian.com/help

888-EXPERIAN (888-397-3742)

TransUnion.com/credit-help

888-909-8872

• Check the report for any charges you do not recognize. Notify the credit bureau if you notice a charge you did not make.
• Consider placing a credit freeze to make it more difficult for someone to open a new account in your name. (Please note this will require some extra steps to verify your identity next time you apply for a service that requires a credit check.) You can place a freeze through each credit bureau.
• It could be beneficial to file taxes as early as possible. This could prevent someone from using your social security number to get a tax refund or a job.
• Notify us immediately of any letters from the IRS. The IRS does not communicate by phone, email, or text. If you receive communications of this type they are not from the IRS. 

To Help Secure Online Accounts:

• Login to all online financial accounts and if possible change the password. Even accounts which may not be a direct financial account, but which utilize any payment system which could be linked to a financial account.
• If you use the same password for any other sites, change those as well. Change passwords at least once every 90 days.
• If you are unable to access an account or are shut out, contact the company whose website you are attempting to access.

To Help Secure Your Debit Cards, Credit Cards, and Bank Accounts:

• If your account is breached, contact your bank or credit card company to cancel and request a new one. 
• Review transactions regularly and notify the cards fraud department immediately if you notice any unusual charges.
• If you have automatic payments set up on the cards make sure to update the information.

To Help Secure Your Driver’s License Number:  

• Contact your nearest motor vehicle branch and report the security breach. The state can flag your license number in case someone else tries to use it, or they may suggest applying for a new one.

To Secure Your Minor Children’s’ Information:

• Request a free credit freeze for your child. This will make it more difficult for someone to use your child’s information to open accounts. You can request a freeze through each credit bureau.
• Generally, children do not have a credit report unless someone is using their information for fraud. You can ask each of the credit bureaus to check their records for any fraudulent activity.
• If a credit bureau has a credit report for your child, they will send you a copy of the report. Use the instructions provided to remove fraudulent accounts.

While we hope this information is never required, having a preparedness plan in the event of a security breach may help to prevent any further issues.

Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation.  Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.

By Kim Ciccarelli Kantor CFP®, CAP®

At times homeownership can seem like driving down a winding road at night–difficult to navigate without some guiding light to lead the way. There are many different books, pamphlets, and articles available covering the subject of home ownership. However, trying to weed through every iota of information on the topic would prove a tremendous undertaking. One topic we have received various questions about pertains to keeping track of home improvements.

“What home improvements should I keep track of?”

“Can they be deducted from my taxes?”

“Is there any future financial benefit beyond possibly increasing the value of my home?”

To shed some “guiding light” on this often essential side of home ownership, we first need to look at the basis of your property.

What is “basis”?

Generally, the basis of an asset is the cost to you. In regards to real estate, it is the amount of your capital investment in property for tax purposes. Your starting basis is what you paid for the home if you purchased it or built it. When you go through the process of purchasing the property, other costs may arise. Some of these costs can be added onto the basis. Settlement and closing costs that you may be able to include in the basis are:

• Abstract fees
• Charges for installing utility services
• Legal and accounting fees
• Survey fees
• Recording fees
• Transfer or stamp taxes
• Owner’s title insurance
• Real estate taxes assumed from seller

If you receive inherited or gifted property and did not technically “purchase” the property, you will still have a basis. The rules for determining it are slightly different. Inherited property can typically be “stepped up” to the fair market value, as appraised, for the property on the date of the decedent’s death. The basis for gifted property typically does not receive a “step up” in value, but retains the cost basis from the original purchaser.

Much like your home, your basis may undergo some “renovations” over time. The starting basis of your home changes to reflect the true cost of your investment. This is your adjusted basis. If you live in a home for years, make improvements and/or additions to the property, the cost of those changes could be added to the basis (if they qualify under the IRS’s guidelines).   

When your property is sold you subtract the adjusted basis from the selling price to determine your profit or loss. This also determines your potential tax liability. As of 2019, if you have lived in your residence for at least two of the last five years, you could keep $250,000 in profits tax-free. For married couples filing jointly, that amount is doubled to $500,000. For property owned less than a year, you are typically taxed at your regular tax rate. Some exceptions do exist, such as if you become disabled or have to sell the home because of a job relocation.

Any profits made over the previously stated amounts may be subject to capital gains taxes. Capital gains taxes are taxes on the profits from the sale of a specific type of asset, such as real estate. The tax is only owed after the asset is sold, not while it is owned. An asset could be held for years, continue to appreciate, and potentially incur substantial tax liabilities without proper planning. Since a higher basis typically means less tax liability, it would be beneficial to assess various expenditures made on your property to determine if they may qualify as an IRS approved improvement.

In recent years, property value has been largely in favor of sellers. As we saw with the housing boom in Silicon Valley, a significant brisk increase in real estate value in an area is possible. If you purchased the home over a decade ago, the inflation of real estate prices could very likely put you over a $250,000 profit. The cost of even just one home improvement could potentially increase your basis by a couple figures. Improvements that can be factored into your adjusted basis include:

• Additional bedrooms, bathrooms, a deck, garage, porch or patio
• Landscaping, a driveway, walkway, fence, retaining wall, or a swimming pool
• Storm windows or doors
• A new roof, siding, or satellite dish
• A heating system
• Central air conditioning
• Central humidifier or vacuum
• Air or water filtration system
• Security system or lawn sprinkler system

It is important to note that regular repairs to the property do not count toward the basis. An improvement adds value to the home, prolongs its useful life, or adapts it to new uses. A repair is necessary maintenance to keep the property habitable and in working condition. In general, if you are adding a new item or upgrading an existing item, it is an improvement. For those considering refreshing their kitchen with some new stainless steel appliances, rejoice!

Whether property has been individually purchased, inherited or gifted, it is important to keep track of any costs which could affect the basis. Most longtime home owners know the importance of keeping track of all home supporting documentation. If there is a disaster, casualty or theft loss, you will need the files to replace or obtain reimbursement for the items. Keeping records of home improvements should follow suit. The IRS recommends that you keep tax returns and any supporting paperwork for at least three years post the return. They can also ask for records up to six years after filing if they suspect someone failed to report twenty five percent or more of their gross income. All receipts or invoices pertaining to the cost of home improvements should also be kept until 6 years after the sale of your home.

Home ownership may bring with it a host of questions, but our team is here to help you navigate the road.