Avoiding the 22% tax bracket and building a house.

[Askel]

My wife and I can live an outrageously comfortable lifestyle in the 12% tax bracket. There's no way we will ever exceed it in retirement (unless the tax brackets change).

As such, that 22% bracket is painful  and I avoid it by maxing out 403b, 457b, and HSA plans through work.

Now we're talking about building a house. Ideally we would finance the land and build with cash. I don't really want to do a new construction loan. I figure we can get a basic, livable house put up for about $70k

We currently have a paid for home worth $40k-$70k, but if I want the higher end, it may need to sit on the market for a couple years. Real estate market is weird around here. 

Easily enough in the tax sheltered accounts to pay for this.

Not really any significant amounts in savings or other that we can withdraw from without any penalty. 

My question: How to do this while staying out of the 22% tax bracket? 

1. Maybe borrow against the tax sheltered accounts? 
2. Home equity line of credit?
3. Sell the house, rent someplace while we build?
4. Suck it up buttercup and save cash, it's only a $7k difference in the end if everything works out perfectly.

Any scenarios I haven't considered? Thanks! 

[MDM]

Is it only $4900 if the whole $70K gets taxed at 22% instead of 15%?

[zolotiyeruki]

Good point by MDM.

Could you split the $70k across two years (say, start construction in October or something like that) to reduce the tax exposure?

[LightStache]

It seems like your options are good across the board. Not sure what your RE market is, but put it on the market 1 Apr and aim to sell during prime season. Plan to live in a rental for 1-3 years while you really get a good contractor lined up and take your time. If you don't want to move twice (not very mustachian), then you can probably fund the construction from a combination of HELOC and 401k loan. Keep in mind that those aren't necessarily better deals than a construction loan.

[Laura33]

Why in the world would you take money out of/away from investments to pay cash for a house when mortgage rates are still so low?  Even if you want to pay off the loan quickly, that lets you spread the payments over several years, so you could still put enough away tax-deferred each year to stay in your preferred tax bracket and just throw the rest at the mortgage.

Otherwise, yes, sell the current house first and rent while you build.  A house is fundamentally a consumption item; your tax-deferred savings are for your long-term needs.  Don't steal from the latter to pay for the former.

[Askel]

Why in the world would you take money out of/away from investments to pay cash for a house when mortgage rates are still so low? 

Can't get a mortgage until the house is done. Need a new construction loan prior to that.  Contractors around here are flaky enough that trying to get a house built on the bank's timeline would just be a nightmare and the resulting expense of "just get it done NOW please" would negate a lot of the tax savings.  Plus paying cash allows me to do most of the work on my own timeline. 

[Askel]

Is it only $4900 if the whole $70K gets taxed at 22% instead of 15%?

Tax brackets are 22% and 12% now, THANKS TRUMP.

[Askel]

then you can probably fund the construction from a combination of HELOC and 401k loan. Keep in mind that those aren't necessarily better deals than a construction loan.

That's kind of what I'm looking at. Not really any better from a financial perspective than a construction loan, but does get me some more flexibility in the building process. 

[MDM]

Is it only $4900 if the whole $70K gets taxed at 22% instead of 15%?

Tax brackets are 22% and 12% now, THANKS TRUMP.

Yes indeed - some things are so ingrained....

[thd7t]

I apologize if this was addressed, but even in the 22% tax bracket, you have more money than in the 12% tax bracket.  While I understand optimizing and wanting to avoid taxes, but how does the 22% squeeze you?