Answers to today’s real estate questions
The rapid rise and the rapid fall in real estate values over the past five years has created as much confusion as it has it has profits and losses. Here are some answers for the thorniest questions I have gotten from homeowners and real estate investors:
Downsizing
I made a $350,000 profit on the sale of my house in California. I’m planning to retire to a brand-new two-bedroom condominium in a warmer- hopefully Florida-climate. I have the ability to pay cash, but would it be better for me to take a mortgage?
I would advise tying a big chunk of your nest egg in an all-cash deal. (This market is very low and will probably go lower) Remember “cash is king.”
What if you decide if you don’t like the area? Or you aren’t satisfied with the new place? You might not have enough available cash to explore other options if your money is tied up in the new place.
MY SUGGESTION: Make enough of a down payment- usually 20 percent- to get the best mortgage terms. Be sure that the mortgage has NO prepayment penalties. If everything is working out fine after a year or two, then pay off the mortgage if you wish. Hopefully by then our economy will be on the way to recovery?
Capital appreciation and taxes
My wife and I own a rental property that is worth about $250,000. We want to sell it and split the proceeds between our two children so they can make down payments on their own homes. How do we minimize or avoid capital gains taxes?
Unfortunately, the property you’re selling is an investment, so you don’t qualify for any principal residence tax exemption. Profits from the sale are subject to a 25 percent depreciation recapture tax, a 15 percent capital gains tax and state income tax, if your state has state income tax.
MY SUGGESTION: Instead of selling the property, refinance it. By doing that, you can still give the money to your children for their down payments, but your tenants will continue to make the mortgage payments for you.
You and your wife are allowed to giveaway $11,000 each annually tax free ($22,000 to each child) without being required to file a gift tax return with the IRS. You and your wife won’t owe gift tax unless either of your total life time gifts exceed $1 million.
My house has more than quadrupled in value, but I bought it before I got married and only my name is on the title. If my wife and I sell the house now, are we both entitled to the capital gains tax exemption on the profit?
Yes. (make sure in this market you get a new appraisal?) If you and your wife both occupied the house as your principal residence for two of the last five years, you can each avoid taxes on $250,000 of home-sale profits. The law does not require that the title to the home be held in both your names so long as you are married and file a joint income tax return in the year of the sale.
Example: Say you bought your home for $155,000 and sell it for $ 675,000.
Your total appreciation is $520,000, but with the $500,000 exemptions, only $20,000 of your profits would be taxed (at the federal capital gains tax rate of 15 percent). If you made capital improvements to the house or paid a sales commission to a real estate agent when you sold, you can add that to your cost basis (the price you paid for the house) and further reduce your tax liability. More next week. As always consult an attorney or tax consultant. I hope everyone that wishes has a Happy Thanksgiving.