The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: YTProphet on September 24, 2014, 08:51:18 AM
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Long time lurker here, but first time poster. I've got a question for you all.
So, I've been aggressively paying down debt for the past three years, and in about two months I'll finish paying off about $160k in grad school loans. At that point, I'll have a few thousand in cash, about $25k in retirement accounts, and that's about it - with one big exception. I own a piece of land (no mortgage) that's worth somewhere between $135k and $195k. The land is right next to my house in a highly desirable, downtown area of a city, and another house could be built on it. Hence its value.
While paying off my debt, it was tempting to sell the land since that would've been the quick and easy solution. However, I would've had to pay capital gains taxes on the sale due to the fact that I've owned my house and the land for less than 2 years. In a few short months, I will hit the two year mark, and if I sell both my house and the land, I won't have to pay any taxes on the gains due to the principal residence exemption. I plan on doing just that.
Once I sell, I'll have probably $10k in my checking account, plus $100K in equity from the house, and somewhere between $135k and $195k from the land (let's call it $150k), for a grand total of $260k. So my question for you is - what should I do with the cash? I could pay cash for a house, leaving me with about $10k given my house price range. I could put the minimum down on a house and sock the rest away in retirement/index funds. I could buy rental real estate (something I've always wanted to do). Any thoughts?
Other info - I currently make around $110k a year in a medium sized city. Cost of living here is very moderate. My wife was laid off recently and we have a kid, so I'm the sole bread winner.
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Sounds like you want to move. Put 20% down on the house of your liking, put the rest in retirement/index funds.
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Sounds like you want to move. Put 20% down on the house of your liking, put the rest in retirement/index funds.
That's what I've been learning toward doing, especially since I'd have cash available if another good investment (like my house/land) comes along. And real estate investing is where my passion is. However, there are other days where I'd just prefer to have a paid off house and sleep knowing the fact that I owe no man anything.
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One of those good problems to have in my opinion. You can make a case for either option. I just got a 15 year mortgage 3 months ago for 3.375%. So the very attractive mortgage rates would possibly sway me to get the mortgage and invest the rest. Neither option is wrong in my opinion.
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Hadn't thought of doing a 15 instead of 30, but that's a good suggestion. Put 20% down, with a 15 year, and shoot to retire around the same time that my house is paid off!
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Why do you want to move from your uber-desirable area? Is it just about money, or do you not like it?
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Build a small efficient home in the empty lot. Rent the big house or rent both. Now you're investing in real estate :)
I'm in a similar situation except my house is already a rental. My plan is to build on the empty lot in the back and then move into it myself. Part of my FIRE safety net is knowing that I can take the principal residence exemption twice by living in both properties if I ever have to sell.
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Why do you want to move from your uber-desirable area? Is it just about money, or do you not like it?
I like it and it's very walkable. I don't really want to move, but I feel like I'd be crazy if I didn't take the money and run.
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Build a small efficient home in the empty lot. Rent the big house or rent both. Now you're investing in real estate :)
I'm in a similar situation except my house is already a rental. My plan is to build on the empty lot in the back and then move into it myself. Part of my FIRE safety net is knowing that I can take the principal residence exemption twice by living in both properties if I ever have to sell.
Wait - I can claim the exemption twice if I live in each property for more than 2 years?
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Make sure you really understand the tax ramifications of what you're doing...and any alternatives suggested here. I'm not a tax person but...
If the lot next door to your personal residence is really a separate lot (different parcel number) than I don't think that the lot will qualify for the capital gains exclusion on personal residence. OTOH if it's one parcel now but splitable by the new owner than cap gains exemption applies.
Once you start mixing investment/rental real estate with a principle residence then the tax situation gets more complicated and you may have to split/pro rate the gain between taxable and exempt.
Definitely worth spending $$ with a CPA or other tax professional to ensure that you understand correctly before you sell how it will be taxed.
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Make sure you really understand the tax ramifications of what you're doing...and any alternatives suggested here. I'm not a tax person but...
If the lot next door to your personal residence is really a separate lot (different parcel number) than I don't think that the lot will qualify for the capital gains exclusion on personal residence. OTOH if it's one parcel now but splitable by the new owner than cap gains exemption applies.
Once you start mixing investment/rental real estate with a principle residence then the tax situation gets more complicated and you may have to split/pro rate the gain between taxable and exempt.
Definitely worth spending $$ with a CPA or other tax professional to ensure that you understand correctly before you sell how it will be taxed.
+1
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Make sure you really understand the tax ramifications of what you're doing...and any alternatives suggested here. I'm not a tax person but...
If the lot next door to your personal residence is really a separate lot (different parcel number) than I don't think that the lot will qualify for the capital gains exclusion on personal residence. OTOH if it's one parcel now but splitable by the new owner than cap gains exemption applies.
Once you start mixing investment/rental real estate with a principle residence then the tax situation gets more complicated and you may have to split/pro rate the gain between taxable and exempt.
Definitely worth spending $$ with a CPA or other tax professional to ensure that you understand correctly before you sell how it will be taxed.
Mary - great advice and I couldn't agree more. I actually checked with a real estate attorney already. The lot is a different tax parcel number, but since the lot is adjacent to my home it still qualifies for the exemption so long as it meets the 2 yr ownership requirement and it's sold within a year of the house being sold. Woo hoo!
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IF you sell, I'd definitely do the 15 year mortgage. With today's rates, you'll be ~5% per annum ahead historically. That's a lot of money.
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Build a small efficient home in the empty lot. Rent the big house or rent both. Now you're investing in real estate :)
I'm in a similar situation except my house is already a rental. My plan is to build on the empty lot in the back and then move into it myself. Part of my FIRE safety net is knowing that I can take the principal residence exemption twice by living in both properties if I ever have to sell.
Wait - I can claim the exemption twice if I live in each property for more than 2 years?
Yes. So long as the total capital gain excluded remains under the lifetime cap ($250,000 for single, $500,000 for married filing joint).
Also, as you may know, the rule is that you need to live in the property for 24 months out of the preceding 60 months from the date of sale. So, in theory, you could sell 2 properties at the same time if in the past 5 years you lived in each for at least 2 years and all the gain (up to the caps mentioned above) would be income tax free.
Another note: The exclusion is for the capital gain tax only! You may, depending on your total income, owe the extra ACA tax on income over 200k/250k. Also, the capital gain would be included in income for ACA subsidy purposes as well.
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Yes. So long as the total capital gain excluded remains under the lifetime cap ($250,000 for single, $500,000 for married filing joint).
The capital gains exclusion for personal residence can be used over and over assuming you meet the requirements each time. There is no "life time cap".
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Yes. So long as the total capital gain excluded remains under the lifetime cap ($250,000 for single, $500,000 for married filing joint).
The capital gains exclusion for personal residence can be used over and over assuming you meet the requirements each time. There is no "life time cap".
You are correct - no lifetime cap! Even better. Thanks for pointing that out