There are many combinations of residence sales, purchases, replacements, and future sales planners need to model in their financial planning software. This post will run through 5 residence sale/purchase/replacement scenarios. There are many ways these can be modeled. Each of the scenarios here go over the most in-depth and effective models.
Scenario 1: Current Residence, Future Sale:
This is the easiest situation to model. This is for clients that currently own a residence, and plan to sell the residence in the future.
Enter the current residence in the Asset section. For the asset details below the table, select the group as “Residence.” enter the current value, cost basis, and assumed appreciation rate.
Next, enter the age of sale and an assumed sales cost. That’s it! You’re done!
Scenario 2: Current Residence, Future Sale and Replacement Residence Purchase
This scenario is just as simple – follow same procedure, with the addition of filling out the “Residence Replacement” fields. This purchases a new residence after selling the current residence.
Scenario 3: Future Residence Purchase
If your clients plan to purchase a home in the future (unrelated to any current residence), the easiest way to model this is to take advantage of the residence sale and replacement feature. Start by entering a residence as a current asset. Set the value to $0.
Now you can use the “Residence Sale” and “Residence Replacement” fields to model the purchase of the actual home in the future. Even though there is not technically a home to sell, the “Age at Sale” is effectively the “Age of Purchase” for the future home.
Scenario 4: Current Residence, Future Sale, with Disjointed Future Replacement Residence Purchase
Combine techniques in scenario 1 and scenario 3 to model this situation. Setup the current residence as an asset and model the sale; leave the replacement information blank (scenario 1).
After that, model the future home purchase. Create another residence with no value, then “sell” and “replace” that residence at the desired age to model the future purchase (scenario 3).
Scenario 5: Current Residence, Future Sale, Replacement Purchase, Future Sale of Replacement Residence
Modeling this scenario is where things get complicated. Residence assets can effectively model the sale and replacement of homes. The program automatically handles the details associated with the process. However, this function only allows for one sale, and one corresponding replacement per residence.
The program is very flexible, leaving several options. The procedure provided in this article keeps everything in the residence sale function. By doing this, the related items (mortgage payoff, sales costs, down payment, etc.) are handled automatically and tracked in specialized reports.
The following steps sell the current residence, purchase the replacement residence, and sell the replacement in the future. To model this, we will need to create 3 residence assets:
- One for the current home and sale of the home (this model is identical to scenario 1).
- Create the replacement home as a current asset so the “Residence Sale” fields are available.
- Offset the replacement home by creating a current residence with a negative value. This corrects the overstatement on the Net Worth and similar reports.
Model the current home sale and replacement:
Model the replacement home as a current residence and model the sale at the desired age:
Note: This causes the overstatement of net worth but allows for future sale. The final step will offset this overstatement.
Create another residence to offset the future residence:
Note: Do not sell the offsetting residence. This avoids double counting the future home at several points:
- Currently, when both the current and future homes exist.
- At the purchase date, when the future home is accounted for twice.
- At the final sale date when the modeled replacement is still present.
Reviewing the Results:
To see the results of residence sales and replacements, see the Residence Sale Worksheet report page (B21 for Prosper, G24 for Aspire). The following report shows the results from the example in Scenario 5.
Do Not Forget About Mortgages
Remember, if there is a mortgage on a current residence make sure you tie that mortgage to the residence asset in the liabilities section. That ensures automatic payoff of the mortgage upon sale of the residence asset.