Author Topic: Advice on selling 2 homes in California, moving to LCL  (Read 926 times)

clairebonk

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Advice on selling 2 homes in California, moving to LCL
« on: July 20, 2017, 04:27:27 PM »
DH and I think it is near time to escape the Bay Area rat race and head east. (Not sure exactly where east. Could be as close as Tahoe, could be as far as Milwaukee.) We would like to sell our houses and buy a new place with cash.

Our main question is: how do we get around paying taxes on a home sale? More so, two home sales? I'm afraid I know little on this topic.

Do we have to buy a new house within XX months?

Obviously we only live in one house. Do we sell that one, move to the other house for a year, then sell that one?

Do we sell the cheap or expensive house first? (We live in the expensive house because it is closer to DH's job.)

How do we time it for DH quitting his job? We don't plan on having much income for about 2 years after he leaves his current job. Obviously we wouldn't sell both houses in December, the same month he quits his job, because then we'd be paying a lot of taxes? Should we sell the houses in years we have little income?

We aren't ready for a complete FIRE but we want to travel a lot now while the kids are little and my parents are still alive. We both enjoy our careers and would rather work while our kids are in school to get to complete FIRE. Having 2 little kids has taken quite a hit on our patience and quality of life (less time to cook, exercise, vacation) and we need a few years to re-establish a happy baseline. We will rent our new place while we travel, then move in when we're ready to re-enter the (hopefully less brutal) rat race.

The real estate market is up in the Bay Area and I'm not sure how much longer it will be high- I just know it is high now.

Thanks for your thoughtful input, it's appreciated.

terran

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #1 on: July 20, 2017, 04:57:36 PM »
A married couple can have a $500k gain tax free capital gain when they sell a home that has been their primary residence for 2 out of the last 5 years. Do either of the houses meet that requirement?

There is no requirement to put that money into another home. Also, remember this is about capital gains, so the $500k only counts what you make on the sale less the amount you paid and improvements you've made.

If you're planning to stay in the bay area another 2 years you could conceivably get the exclusion on both houses by moving into the one that isn't currently your primary residence. Or if both have been your primary residence in 2 of the last 5 years you could just sell the other one and stay put until the 2 year waiting period before you claim the exclusion again is up.

Assuming one of the houses has been a rental, I believe you still have to recapture any depreciation you have claimed in the past, so you'll need to look into that.

If you are going to have some capital gains that won't be excluded (they don't meet the requirements or they're over $500k), then it might be advantageous to try to arrange for the sale to take place during a year in which you didn't work as any capital gains within the 15% bracket ($75900 plus deductions, standard or otherwise and exemptions) is taxed at 0% and it's not until the 39.6% bracket ($470,700 plus deductions and exemptions) that the rate goes over 15% to 20%.

I suppose trying to establish residency outside California before the sale could also be good depending on how each state treats capital gains. It looks like the federal primary residence exclusion also applies to California.

clairebonk

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #2 on: July 20, 2017, 05:21:44 PM »
Thanks so much, this is so helpful! We'll have lived in our current house for 2 years, so after we sell this one maybe we will move into the other house for 2 years and then sell that one (hopefully the market is still up).


terran

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #3 on: July 20, 2017, 05:49:41 PM »
That would definitely seem to be a good plan if it meets with your timeline. Could be worth doing doing the math (a demo tax return) to see just how bad the damage would be if you just sell it if you don't really want to stick around 2 years. The lower cost of living could well make up the difference since capital gains have pretty low taxes. Also remember to look into the depreciation recapture thing if the second house has been a rental and you've been claiming depreciation.

TomTX

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #4 on: July 23, 2017, 09:34:08 AM »
Don't forget about Calif states taxes on the sale too. Pretty sure the $500k married/$250k single fed exclusion is also good on Calif taxes but I believe any profit beyond  that is taxed as ordinary income rather than cap gains. I may be wrong though so hopefully someone knowscas I'm also selling my house in Calif and will have a substantial taxable profit even after taking the $250k exclusion.

Find yourself a suitable temporary spouse for tax purposes ;)
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JDubIncident

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #5 on: July 26, 2017, 12:31:43 PM »
Don't forget about the recapture of depreciation if the second home is used as rental. There are a few ways to approach this, one has already been mentioned, sell one and move into the other and then sell the second. You may want to consider a 1031 exchange on the non-owner occupied home. You could either buy your next residence with the proceeds or buy an income producing in a location with better cash flow the bay area. This way you could buy the home you will live in after you leave the bay now capturing the current high values by using a 1031 exchange and rent it out in the interim. You can then sell the higher priced home and either pay of the mortgage on the new home or invest the money as you see fit. Another variation is that you could rent out the higher priced home after you move and then sell it up to three years later maintaining the capital gains exemption.  I live in Truckee and think it is hilarious you call Tahoe a LCL area, I guess everything is relative. Depending on how well you do on the sale of these assets you may want to consider Incline Village, while an expensive market, the tax savings in ER will be huge depending on the size of your nest egg. As always consult your tax professional.

clairebonk

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #6 on: July 27, 2017, 12:05:08 PM »
I suppose Truckee isn't super low-cost, as my friend is trying to move there from Benicia and found only 4 houses under $400k, none with a garage. How is it living there? Do you spend all your time enjoying the wilderness, are there other Mustachians?

tonysemail

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Re: Advice on selling 2 homes in California, moving to LCL
« Reply #7 on: July 27, 2017, 06:18:17 PM »
the homeowner tax exemption is pro-rated according to how long the property was used for personal residence vs rental.
this changed in 2009 and is well described here.
Depending on your circumstances, you might still feel that it's worthwhile to get the pro-rated amount.
https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-for-irc-section-121-capital-gains-exclusion/

if the capital gain is large enough to push your AGI above 250k, then you would need to pay some NIIT.
a 1031 exchange is a good way to defer that.
I've also read that structured sale and installment sale are strategies to avoid paying NIIT.

moving out of state doesn't exempt you from paying income tax to California.
If you sell a CA house, then FTB still expects to be paid, even if you are a non-resident of CA.
https://www.ftb.ca.gov/individuals/filertn/nonresidents-part-year-residents.shtml