Excluding capital gains on primary home, cash out or bank it?

ps99472

ps99472

New member
So lets say hypothetically a homeowner couple is approaching the 2 year anniversary COE of their primary home.  In that time, home has appreciated a good chunk, close to the max $500,000 exclusion on capital gains allowed by IRS and state of CA:
http://www.irs.gov/publications/p523/ar02.html#en_US_2013_publink1000200709

What would you do?  Being able to retain that much money tax free seems like a no brainer for the homeowners to cash out.  Then what?  Rent back from the buyers while you wait to buy another house?  Buy some Tesla's and drive across the US and home-school your kid(s) in the Tesla X back seat?  Use the gains to buy another downsized home as a 100% FCB and live mortgage free for the rest of your life? 

So if you play it safe and not sell your home.....  extra cushion in case you ever lose a job or your spouse, and worst scenario you die or get really sick.  You'll also establish good roots for your child living in a good community by not moving.  But you'll always wonder about the road not traveled...

Again the money so enticing...
 
ps9 said:
So lets say hypothetically a homeowner couple is approaching the 2 year anniversary COE of their primary home.  In that time, home has appreciated a good chunk, close to the max $500,000 exclusion on capital gains allowed by IRS and state of CA:
http://www.irs.gov/publications/p523/ar02.html#en_US_2013_publink1000200709

What would you do?  Being able to retain that much money tax free seems like a no brainer for the homeowners to cash out.  Then what?  Rent back from the buyers while you wait to buy another house?  Buy some Tesla's and drive across the US and home-school your kid(s) in the Tesla X back seat?  Use the gains to buy another downsized home as a 100% FCB and live mortgage free for the rest of your life? 

So if you play it safe and not sell your home.....  extra cushion in case you ever lose a job or your spouse, and worst scenario you die or get really sick.  You'll also establish good roots for your child living in a good community by not moving.  But you'll always wonder about the road not traveled...

Again the money so enticing...
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In this example, don't think it makes sense to let the tail (taxes) wag the dog. Besides, if you sell you're also giving up favorable property taxes.

If the house fits your needs, don't sell. If it doesn't, move on. Maybe that's over simplifying, but that's how I view it.
 
I thought it was 5/2 year rule.  You need to own it for 5 year and live there at least 2 year of the 5 year you own the home.

Your are right about the 1/2 million dollar exclusion on capital gain tax, it is very enticing. I have this same dilemma not to long ago and I decided to sell the home and keep the significant amount of capital gain tax free.  :)
 
i1 said:
In this example, don't think it makes sense to let the tail (taxes) wag the dog. Besides, if you sell you're also giving up favorable property taxes.

If the house fits your needs, don't sell. If it doesn't, move on. Maybe that's over simplifying, but that's how I view it.
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Favorable property taxes?  In what way?  If you mean not paying the property tax on $500,000 capital gains due to prop 13, that's what $5000/year?  Not a game-changer.  If going with a new build, MR and CCDs will be much much higher, but again, not enough of a game-changer. 

I thought I had that view about homes fitting your needs etc... but if I have to chance to jump to the next level, it will serve my needs even better :)
 
lnc said:
I thought it was 5/2 year rule.  You need to own it for 5 year and live there at least 2 year of the 5 year you own the home.

Your are right about the 1/2 million dollar exclusion on capital gain tax, it is very enticing. I have this same dilemma not to long ago and I decided to sell the home and keep the significant amount of capital gain tax free.  :)
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From the link I provided:

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

Owned the home for at least 2 years (the ownership test), and

Lived in the home as your main home for at least 2 years (the use test).
 
ps9 said:
i1 said:
In this example, don't think it makes sense to let the tail (taxes) wag the dog. Besides, if you sell you're also giving up favorable property taxes.

If the house fits your needs, don't sell. If it doesn't, move on. Maybe that's over simplifying, but that's how I view it.
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Favorable property taxes?  In what way?  If you mean not paying the property tax on $500,000 capital gains due to prop 13, that's what $5000/year?  Not a game-changer.  If going with a new build, MR and CCDs will be much much higher, but again, not enough of a game-changer. 

I thought I had that view about homes fitting your needs etc... but if I have to chance to jump to the next level, it will serve my needs even better :)
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Well, seems like you already have the answer to your own question. But you had also mentioned downsizing to a smaller home to be mortgage-free as another possibility so it wasn't very clear.

If you already know you want to move up in the near-term, then definitely I'd sell. But it's not like prices are moving up very fast right now, so I don't think it matters if you sell now or wait a few years.

If you're thinking of it as a long-term strategy to sell your house every time it goes up $500k, you will also be paying 5-6% commission to a realtor for each transaction. I actually do know someone who uses this strategy, but it's more biz related so it makes sense.

btw, the difference between upfront cap gains tax savings on $500k and $5k annually over a lifetime of home ownership shouldn't be a game changer either. especially if a person favors safe, low-risk investments.
 
if you sell now and then buy with no downward change in prices from the level you sold at, you are not creating any value for yourself.  the only way you are  better off is if you sell, keep the 500K tax free gain, rent until prices drop and then buy again. 

like you said, you can sell, buy a smaller home in cash, but you wont create value for yourself. but it is enticing to not have a mortgage, but not at the expense of impairing the enjoyment of your home, meaning if you need 3000 sq ft, buy a 2200 sq ft home and then you are miserable then its probably not worth it.

if you buy a new bigger home, you may actually be worse off.  you have to pay the 5-6% commission on your sale. if you sell at 400 sq ft, buy new construction at 400 sq ft you have landscape/hardscape costs, new window treatments, etc, a higher property tax base + MR you will definitely be worse off.
 
Ps9 - if you feel that we are near the peek for this housing cycle then I would sell. Then I would rent for a while.

However, I don't feel we are near the peak. So I would wait to sell.
 
Are we at peak, past the peak or still waiting for the peak?

Seems like the market peaked during 2013 but has cooled off this year.
 
irvinehomeowner said:
Are we at peak, past the peak or still waiting for the peak?

Seems like the market peaked during 2013 but has cooled off this year.
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RE seems like it's back to "normal" now.  Normal being.. Irvine will still be high.  I think hard assets might be a good thing to hold now... how else can they raise interest rates without inflation going way up?  The dollar is going to be worth less and less.
 
qwerty said:
if you sell now and then buy with no downward change in prices from the level you sold at, you are not creating any value for yourself.  the only way you are  better off is if you sell, keep the 500K tax free gain, rent until prices drop and then buy again. 

like you said, you can sell, buy a smaller home in cash, but you wont create value for yourself. but it is enticing to not have a mortgage, but not at the expense of impairing the enjoyment of your home, meaning if you need 3000 sq ft, buy a 2200 sq ft home and then you are miserable then its probably not worth it.

if you buy a new bigger home, you may actually be worse off.  you have to pay the 5-6% commission on your sale. if you sell at 400 sq ft, buy new construction at 400 sq ft you have landscape/hardscape costs, new window treatments, etc, a higher property tax base + MR you will definitely be worse off.
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That is what common sense/intelligent thinking tells but it hasn't gotten me anywhere.  My friends who took a chance and sold their house and moved up are sitting on a much, much higher equity than me.  In good times it appears that the larger houses are appreciating much faster (even when you consider the % change)
 
Thanks for all the input guys, but I still want to take that jump.  Hard part will be convincing my wife to take the plunge with me.
 
Did your "homeowner couple"'s home really appreciate $500k in 2 years? Or is that just the equity it has from the down, the added deposits and the reduced principal from refis?

Is the couple happy with their present location? Is the new location they are looking at better? Not sure I would bank and rent because you never know what is going to happen in the next 1-5 years. I would look for something where if I put that down as a deposit, the mortgage isn't more than current rent.

We were in a similar situation years ago and where we made the mistake was buying something that wasn't quite where we wanted to be. So my advice to that couple is to carefully weigh where they are going to be in in the future and what they really need vs what they have now.
 
PS9 - what do you want in a home that your home doesnt have now? I would have a hard time selling my house because i really like the central location and the floor plan has just about thing we want/need. Downstairs we have the greatroom/kitchen, formal dining AKA Qwerty Gym, downstairs bedroom with its own bathroom and half bath for guest. 3 Car garage. upstairs is 3 beds of which two have their own bathroom, then there is a third bathroom in the hallway, so each bedroom gets its own bathroom. upstairs loft.  the only things im missing are a driveway which is a nice want but not a need and another room downstairs for an office.
 
Where you really come out ahead by selling and buying another home is if home prices appreciate another 500k. Currently you'd owe capital gains taxes on the second 500k but if you sell and buy a new home you start again from 0.
 
paperboyNC said:
Where you really come out ahead by selling and buying another home is if home prices appreciate another 500k. Currently you'd owe capital gains taxes on the second 500k but if you sell and buy a new home you start again from 0.
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you can just get a second wife and tack on another 250K of capital gains free taxes. If it goes up 500K, just get two more wives. That's what i do guys, i solve problems all day.
 
qwerty said:
paperboyNC said:
Where you really come out ahead by selling and buying another home is if home prices appreciate another 500k. Currently you'd owe capital gains taxes on the second 500k but if you sell and buy a new home you start again from 0.
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you can just get a second wife and tack on another 250K of capital gains free taxes. If it goes up 500K, just get two more wives. That's what i do guys, i solve problems all day.
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And make sure all these additional wives all fit qwerty's 80% rule otherwise the divorce could be real ugly.
 
irvinehomeowner said:
Did your "homeowner couple"'s home really appreciate $500k in 2 years? Or is that just the equity it has from the down, the added deposits and the reduced principal from refis?

Is the couple happy with their present location? Is the new location they are looking at better? Not sure I would bank and rent because you never know what is going to happen in the next 1-5 years. I would look for something where if I put that down as a deposit, the mortgage isn't more than current rent.

We were in a similar situation years ago and where we made the mistake was buying something that wasn't quite where we wanted to be. So my advice to that couple is to carefully weigh where they are going to be in in the future and what they really need vs what they have now.
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Did it really appreciate $500k?  Well you can check, you know the 'info' :)  It's pretty close based on recent closed comps.  And yes its based on the previous sale price not factoring in deposit, principal payments, etc. 

Couple happy?  Yes very, but will be happier at new location?  Of course not 100% sure but the risk will be justified by the reward. 
 
@ps9:

Too lazy too look it up... don't remember everything like some of the #monitors here.

Have prices in that area really gone up that much in only 2 years? Seems like it's been longer. But I guess if prices jumped over 20% in 2013, that makes sense.
 
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