Author Topic: Worth Selling Home to avoid Capital Gain Tax?  (Read 1726 times)

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Offline aquabliss

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Worth Selling Home to avoid Capital Gain Tax?
« on: August 14, 2017, 03:18:16 PM »
Talked to a friend over the weekend who has a home in Northpark (might be Northwood - can never keep those straight), and he mentioned that based on recent neighborhood comps, he's right about at the $500,000 gain mark (married and filing jointly) if he sold his home (inc. capital improvements). 

He likes his house but doesn't care if it's his forever home and it isn't sentimental for him.  He was telling me he plans to sell within the coming months mainly for the purpose of not having to pay capital gains tax in case (or rather when) the house values rise.  He basically doesn't mind trading for a house of the same size and similar price to reset his capital gain counter. 

He'll of course  have to pay closing costs, agent fees, cleaning, fixing, etc. but he thinks it's worth it not to have to pay tax on the next $500k of gains. 

What do you guys think about this?  Good strategy or not?  He mentioned there are very few things in life that you can sell/acquire/gain tax free and it's worth taking advantage of these while they're still available.

Offline jmoney74

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #1 on: August 14, 2017, 03:20:42 PM »
Talked to a friend over the weekend who has a home in Northpark (might be Northwood - can never keep those straight), and he mentioned that based on recent neighborhood comps, he's right about at the $500,000 gain mark (married and filing jointly) if he sold his home (inc. capital improvements). 

He likes his house but doesn't care if it's his forever home and it isn't sentimental for him.  He was telling me he plans to sell within the coming months mainly for the purpose of not having to pay capital gains tax in case (or rather when) the house values rise.  He basically doesn't mind trading for a house of the same size and similar price to reset his capital gain counter. 

He'll of course  have to pay closing costs, agent fees, cleaning, fixing, etc. but he thinks it's worth it not to have to pay tax on the next $500k of gains. 

What do you guys think about this?  Good strategy or not?  He mentioned there are very few things in life that you can sell/acquire/gain tax free and it's worth taking advantage of these while they're still available.

calculate how much more in prop taxes he has to pay on the next house?

Offline aquabliss

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #2 on: August 14, 2017, 03:27:38 PM »
Yes J$ he realizes it will be approx. $5k - $7k more annually  in additional prop tax if he bought a house of the same price, then he mentions about additional deductions so that's not the true cost yadda yadda then things start to get blurry or I need a whiteboard to continue the discussion.

I guess to figure this out you have to do some hypotheticals.  Say the new houses increases $500k more in 10 years, then figure  our the capital gain tax on $500k (probably at a very high rate) vs 10 years of paying extra prop tax and fees on  the house you sold.  I think going to the new house still wins, but of course with those assumptions.

Offline best_potsticker_in_town

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #3 on: August 14, 2017, 03:32:21 PM »
Is he using the capital gain tax as an excuse to buy a new home because that's what he really wants and needs to justify to make him feel better? Or, is he selling purely for the tax benefit?

If it's the latter and it's a perfectly good house, I don't know if it makes a ton of sense. Barring any tax code changes, you still get the $500k benefit, it's only gains on top of that that would be taxed. If they need a new house - sounds like a great time for them to make a move.

But hey - if someone is ahead and wants to cash out, who are we to say no to that?

Offline AW

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #4 on: August 14, 2017, 03:49:42 PM »
Don't know the persons situation.
Cash out, $500k tax exemption and downgrade to a smaller home a possibility as well?  Partay time
(Or buy bunch of cash flowing properties and retire early)

Offline momopi

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #5 on: August 14, 2017, 04:08:20 PM »
?_?

Someone correct me if I'm wrong, but if you sold the house and made $600K, you can qualify for the $500K capital gains tax exemption and only pay taxes on the remaining $100K?

Offline USCTrojanCPA

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #6 on: August 14, 2017, 04:10:55 PM »
?_?

Someone correct me if I'm wrong, but if you sold the house and made $600K, you can qualify for the $500K capital gains tax exemption and only pay taxes on the remaining $100K?


Correct...the $100k would be subject to Federal & State long-term capital gain tax and potentially the 3.8% healthcare tax (depending on income level).
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Offline Perspective

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #7 on: August 14, 2017, 04:12:02 PM »
?_?

Someone correct me if I'm wrong, but if you sold the house and made $600K, you can qualify for the $500K capital gains tax exemption and only pay taxes on the remaining $100K?

$500K is excluded from federal income tax for a married couple selling a primary residence (2 of last 5 years). So, if the gain is $600K, $100K would be subject to cap gain tax - as much as 23.8%.

This guy is letting the tax tail wag the dog. Taxes are a consideration, but shouldn't be the primary motivation for a move-up/down in house.

Offline Liar Loan

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #8 on: August 14, 2017, 04:41:13 PM »
A better idea:  Make it his "forever" home and pay no capital gains, whatsoever.  Then let his heirs inherit it at the stepped-up basis, with no cap gains taxes owed regardless of how much it has appreciated, and let them retain the Prop 13 basis for as long as they own it.

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Online qwerty

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #9 on: August 14, 2017, 07:21:13 PM »
Assume a long term capital gains rate of 20%, if he pays 60k in closing costs (assuming a sales price of $1M), that means the house would have to appreciate another $300k (60k/.20) before he is worse off. So his house can go up to 1.3M and he is still in the same place.

Offline aquabliss

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #10 on: August 15, 2017, 12:53:15 AM »
Assume a long term capital gains rate of 20%, if he pays 60k in closing costs (assuming a sales price of $1M), that means the house would have to appreciate another $300k (60k/.20) before he is worse off. So his house can go up to 1.3M and he is still in the same place.

I thought any gain over the $500k was taxed as ordinary income not LT capital gains, I think my friend believes the same.  Is it taxed at LT capital gains rate only?  That wouldn't be bad if the capital gains rate is assessed separate from the marginal tax rate (meaning the gain on the home sale isn't used to dictate the marginal rate), otherwise yes 20% but still not as bad as ordinary income rate.

Offline aquabliss

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #11 on: August 15, 2017, 01:00:04 AM »
Is he using the capital gain tax as an excuse to buy a new home because that's what he really wants and needs to justify to make him feel better? Or, is he selling purely for the tax benefit?

If it's the latter and it's a perfectly good house, I don't know if it makes a ton of sense. Barring any tax code changes, you still get the $500k benefit, it's only gains on top of that that would be taxed. If they need a new house - sounds like a great time for them to make a move.

But hey - if someone is ahead and wants to cash out, who are we to say no to that?

Mostly the tax benefit.  I really think he hates the thought of paying taxes on any additional gains going forward, and kind of agree that it's not as exciting to see your property value rise when you know .30c or more on every dollar is not yours.  Crap I drank his kool aid.

I told him to put in a pool or do a room addition then he has that much more gains tax free, but I don't think he wants the hassle of doing so.

I guess eventually we'll all have to deal with this same dilemma if we stay put long enough.

Online qwerty

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #12 on: August 15, 2017, 05:51:05 AM »
Assume a long term capital gains rate of 20%, if he pays 60k in closing costs (assuming a sales price of $1M), that means the house would have to appreciate another $300k (60k/.20) before he is worse off. So his house can go up to 1.3M and he is still in the same place.

I thought any gain over the $500k was taxed as ordinary income not LT capital gains, I think my friend believes the same.  Is it taxed at LT capital gains rate only?  That wouldn't be bad if the capital gains rate is assessed separate from the marginal tax rate (meaning the gain on the home sale isn't used to dictate the marginal rate), otherwise yes 20% but still not as bad as ordinary income rate.

Any sale of an asset is a capital gain, just whether it's short Vs long term. He would have to buckets of income, ordinary income and capital gains income with each income bucket taxed at its respective rate.

Offline undecided

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #13 on: August 15, 2017, 01:42:59 PM »
Assume a long term capital gains rate of 20%, if he pays 60k in closing costs (assuming a sales price of $1M), that means the house would have to appreciate another $300k (60k/.20) before he is worse off. So his house can go up to 1.3M and he is still in the same place.

I thought any gain over the $500k was taxed as ordinary income not LT capital gains, I think my friend believes the same.  Is it taxed at LT capital gains rate only?  That wouldn't be bad if the capital gains rate is assessed separate from the marginal tax rate (meaning the gain on the home sale isn't used to dictate the marginal rate), otherwise yes 20% but still not as bad as ordinary income rate.

In this case LT cap gains rate, held the asset over a year.  Also, since its a personal residence, you have no depreciation recapture (unlike with a rental property), so no portion is taxed at ordinary income rate.

To me that lowers the incentive for me to lock in my 500k of tax free cap gain.  But none of us can predict the future.  I hear that one of the deductions that might go away is the mortgage interest deduction, and if that happens I think it has a definite impact on property values.

Offline Cornflakes

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Re: Worth Selling Home to avoid Capital Gain Tax?
« Reply #14 on: August 22, 2017, 10:33:50 PM »
To keep the calculation strictly unemotional, I'd assume that he sells the house at $1M and next day he buys the same house at $1M - stepping up basis and capturing exemption (though there may be rules against it, who knows).

In this case, he'd fork over about $60k in selling costs and $5-$6k each year in additional property taxes. For simplicity, assume his borrowing costs remain the same. He is still giving away good chunk of money saved by avoiding taxes.

If it was me, I'd get HELOC out, convert it into rental and buy another primary home with HELOC cash. Once rental, 1031 out into whatever pleases him and never pay taxes.

 

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