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Capital Gains Tax - Question and Biden
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Serial origamist
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Thanks for the ideas.


Well, Tori doesn't have an accountant. She's always done her taxes by hand or using one of the popular software programs.

But it sounds like this may be an occasion where it's worth it to pay a professional to do some professional work.

The state Tori lives in does not currently have a state CG tax, although some libruls are proposing one. Her state is also one of the few that does not have a state income tax, but a very high sales tax.

It's all well and good to say that she should sell the house poste haste, but one must live somewhere, and finding another house on short notice is easier said than done. It sounds like pique is in a similar situation.

There are many places in this general area where one can find a decent house for $400K, although prices have been going up and up over the last year. Still, the area her house is in is one of the hottest markets in the country and has been for a while, so she's been hoping that if the market elsewhere levels off a bit, this one will keep climbing, so in relative terms, she could drop a third of what her house would sell for on a new place and still be very comfortable.

Her house is a mile or so from where a ginormous company that sells stuff on the interwebz is moving their headquarters and bringing 20,000 jobs there in the next two or three years. And other companies are following close behind.


I mentioned that she has done little or no maintenance on the house over the last ten or 15 years. It would take a huge investment to make it suitable to rent out. Maybe $40 - 50K, more now that building materials have tripled in price, and finding a contractor, getting on his or her schedule, and then actually getting the work finished seems like it might take a year. And as soon as it's sold, they're gonna scrape it off the lot and haul it to a landfill. So, renting it out... doesn't seem like a viable option.


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Posts: 30030 | Registered: 27 April 2005Reply With QuoteReport This Post
Pinta & the Santa Maria
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Leaving aside tax implications a bit, if Tori hasn't maintained her dwelling in the past 10-15 years, another school of thought has it that she should sell her house now, if she's ever going to. The market is crazy hot and she should get top dollar selling it "as is." We have good friends who sold their house as is for about $650K last month, knowing that it needed nearly $100K in repairs/updates. A flipper bought it, will invest that $100K and if the market remains high (there's the kicker) it should sell for around $850-$900K.

I wouldn't rely on the market continuing to go up, and unless you're a professional (and even then questionable) I think it's difficult to time the market.

My 2c!
 
Posts: 35367 | Location: West: North and South! | Registered: 20 April 2005Reply With QuoteReport This Post
czarina
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quote:
Originally posted by Steve Miller:
If I were in Tori's situation (and I am, although not to the extent she is), I would look in to either selling right away or making her house in to a rental for a few years if her tax account says that's legit.


If you lived in the house 3 out of the last 5 years you get the 250/500k exemption but you have to pay taxes on the depreciation you took while it was a rental. If you rent out the house a day longer than 3 years, the house becomes an investment property and will be treated that way for tax purposes.

However, I don't see the advantage of turning it into a rental and doing a 1031. You can only buy another investment property with the proceeds--you cannot live there for at minimum two years. So that is--at minimum--five years you must live somewhere else besides your current or future home. Furthermore, you must put 100 percent of the proceeds from the house into the new house. Any proceeds that don't go into the new property are considered "boot" and you have to pay capital gains taxes on them. And you can't deduct any capital improvements against the boot.

Example: you paid $250k 20 years ago for the house. You rent it out for 3 years and a day,, then sell it for $2 million. You do a 1031 exchange, buying the house you'd like to live in some day for $400k. You pay capital gains taxes on every penny you received beyond the $400k--you have to pay taxes on $1.6 million. Then you have to rent out the $400k house for 2 years before you can move in yourself. And then you have to STAY there. You can't decide to sell the house and move to Alaska for at least 5 years. This is all per info given me by my accountant and my QI. And the time periods for how long you have to rent out the new house and how long you have to live there are GUESSES. The IRS can decide it wasn't long enough--there is no set amount of time.

So you are much better off selling the house as your primary residence and taking your $500k exemption. Not to mention that with a 1031 you have to pay a QI thousands, and the hoops you have to jump through with deadlines are murder.

quote:
If Biden's proposal goes through it will be interesting to see what happens to the housing market. I can easily envision a scenario where there is a glut of $million homes on the market driving down prices.


This is what we need so that people can afford to live in their own communities again. Investors are driving everyone out.


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Posts: 21305 | Registered: 18 May 2005Reply With QuoteReport This Post
czarina
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If I were Tori I would sell right now, for all the reasons Nina stated. Have a bidding war, take the highest all cash offer with no contingencies, take your $500k exemption, pay taxes on the rest like a good citizen, buy your $400k house (now a $600k house, btw), and live happily ever after.

Oh, and definitely get the advice of a very experienced and savvy accountant.


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Posts: 21305 | Registered: 18 May 2005Reply With QuoteReport This Post
czarina
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quote:
Originally posted by Steve Miller:
quote:
Originally posted by piqué:
I can't answer Tori's questions. What I want to know is, where is this cooler market where Tori can buy a house for only $400k?


Phoenix is one, especially the 'burbs. NW Ohio is another. Other smaller cities offer very nice new houses for $400K or less, in some cases much less.


Which part of "cooler" did you not understand? Big Grin


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Posts: 21305 | Registered: 18 May 2005Reply With QuoteReport This Post
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