Author Topic: Sell house after 18 months- pay capital gains- or hold on a bit longer?  (Read 5844 times)

FinallyAwake

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Hi all!  My first post here- hope to participate a lot in the future!

Problem stated simply: We have a house that is bleeding us dry and we have finally wised up to that fact. 

We bought it last June 2013 for $425k.  (The bank said we "qualified" for 500k- so glad we didn't listen!).  The redeeming factor in this, is that our realtor thinks it's now worth in the $510-$550k range.  We said "AWESOME!", put a sign in the yard three weeks ago and listed it for $525k.

AND THEN.....we remembered Uncle Sam's Capital Gains taxes.  We talked to a tax guy, (we usually do TurboTax), and he said, "come back to me when it's time to do your taxes and we'll find a work-around".

I'm not exactly sure how I feel about this.  The implied "lie" makes me feel kind of icky, but if it's a truly legal maneuver, who am I to judge?  But also, what if we CAN'T find a truly legal "work-around"?  My very limited math skills/tax knowledge makes it look like we'd owe about $9k.

  $520k hypothetical selling price
-   425k purchase price
-       4k carpet replaced
-     21k agent commission (friend rate)
=  $65k gains, taxed at 15%= $9,300 penalty 

Of course, we could just delist and relist in April.  But we are literally living paycheck to paycheck, with no 401k contributions at all, no fun $ for the kids, barely making minimum credit card payments.  We have a car (btw, both are paid for, 10 years old and 200k miles) that needs some serious work, possibly replaced.  We don't have cable or land lines, only pay for one cell phone.  I've already reduced my grocery budget; no more organics for us!  :)    I can list our exact numbers if that helps with your ability to give advice.   

I don't like to speculate on the housing market- who knows what April 2015 will look like for the market in my area?  What if it crashes?  On the other hand, what if it continues to appreciate?  My gut tells me to take the money (and possible penalty) and run FAR FAR away to a "tiny" house as soon as possible.  But there's enough of a question in my mind, that I thought it best to run our situation past you fine folks.

So, what would you do?  Coast until April, accruing interest on the credit cards, no retirement contributions, crossing fingers that the housing market doesn't depreciate, and hoping no job losses or major life issues come our way?  Or sell ASAP, accepting the $9k penalty but hope the tax man can deliver his "work around"?   

THANKS IN ADVANCE!!
« Last Edit: August 15, 2017, 11:07:58 PM by FinallyAwake »

pdxvandal

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #1 on: September 01, 2014, 05:27:00 PM »
Why would you get taxed on the gains? If you own it for more than a year, you can claim up to 500k (married) of capital gains tax free ... or so I thought.

olivia

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #2 on: September 01, 2014, 05:28:24 PM »
I would sell it as soon as possible.  You seem to know that already.  Good luck on the sale!

Catbert

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #3 on: September 01, 2014, 05:42:57 PM »
Why would you get taxed on the gains? If you own it for more than a year, you can claim up to 500k (married) of capital gains tax free ... or so I thought.

This is wrong.  It's 2 years (out of the last 5) for the 500K capital gains exclusion.

That said I would probably sell now if it's eating you alive.  Paying 9K in taxes is worth it.  It may take you several months to get an offer.  If you're really close to the 2 years then ask (counter offer) the buyers to delay closing.

Another Reader

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #4 on: September 01, 2014, 06:07:49 PM »
Three weeks ago?  How many showings have you had?  Are you located in a hot market or is your market lukewarm or cool?  If you are in a hot market, and you have had few showings and no offers, you may be overpriced.  If your market is slow and/or you live in a climate with cold falls and freezing winters, this property may still be on the market in the spring because people move in the late spring and summer.

If it sells and you have to pay capital gains tax at whatever the rate is, look at it this way.  You made a profit and you get to keep most of it.  The loss to the capital gains tax may not be much more than the net carrying costs of the house for an additional six months.

waltworks

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #5 on: September 01, 2014, 06:27:08 PM »
In the larger context, what will make your life better: selling now, getting a nice windfall, and being able to get out from under the cloud, or hanging on as long as possible to save $9k?

I'd sell and not think about it again, and tell my tax guy not to bother with any shenanigans, because you'll owe the tax fair and square.

-Walt

frugaliknowit

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #6 on: September 01, 2014, 06:32:08 PM »
"...We bought it last April 2013 for $433k.  (The bank said we "qualified" for 500k- so glad we didn't listen!).  The redeeming factor in this, is that our realtor thinks it's now worth in the $510-$550k range.  We said "AWESOME!", put a sign in the yard three weeks ago and listed it for $530k."

Question:  Did your realtor/friend show you comparables or adjusted comparables that actually closed in the $510-550 range?  While certainly possible, that's a pretty steep gain of around 25% in 17 months (back of the envelope 17%ish annual...?).

Regardless of what you can get for it, better dump it if you can't afford it.

mikefixac

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #7 on: September 01, 2014, 06:58:27 PM »
Seems to me you would only have to pay "long term" capital gains taxes if sold now, which is lower than ordinary income tax. But if held onto for 2 years, pay $0 in taxes.

So how about this idea: You sell the house, save 6% by not using an agent. 6% of $500K is $30K. $30K + $60K capital gains is almost $100K. Not bad having a ~$100K tax free after 2 years. Sell the house now but close on 2 year anniversary of purchase date.

Just throwing out ideas. Hope it helps.

Primm

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #8 on: September 01, 2014, 08:55:52 PM »
Agree with the above responses. Having to pay capital gains tax means, by definition, you've made a capital gain.

In your hypothetical situation (if you sell the house now for what you're asking), you make a capital gain of $97k ($530k - $433k - yes, I get that there is more to this, keeping it simple...). You pay your $9k capital gains tax. You're still $88k in the black on the transaction.

My father was self employed. He used to minimise his tax legally, never paying more than he had to. However he used to relish a bigger than normal tax bill, because it meant he'd made more money. If you don't earn / make the money, you don't have to pay the tax.

Joel

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #9 on: September 01, 2014, 09:33:33 PM »
One of the posters started to hint towards this, but if you can hold off until you have lived there for two full years, you are eligible for 500k in tax free capital gains. I think your best bet is to wait until you have been there two full years.

Another Reader

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #10 on: September 01, 2014, 09:55:46 PM »
With a custom house, marketing time depends on how the custom features are received in the market.  If this property is close in and/or offers a relatively easy commute, such as Scottsdale, Peoria, Tempe or Chandler, I can see 60 to 90 days in that price range.  The most desirable areas are probably 30 to 60 days average marketing time.  If you are in an outer suburb with a tough commute such as Anthem or Queen Creek, it may be awhile.  Typically, when you have a lot of showings but no offers, it means you are overpriced by a few percent.  And there is nothing worse than agents showing your property to people that are not in a position to buy.  They are using your property to motivate their clients either to list with them or drop their price so they can sell that house, not yours.

The real estate reports for Phoenix show the hot markets are below $200k and above $800k.  The $500k to $800k market is much slower.  If you get to one month and have no offers, I would review the comps again and consider dropping the price.  The one thing you want to avoid is a stale listing - on the market for 90 days or longer for the more expensive houses.   Better to take a little less profit in a cooling market than wait until you make the two year mark.

frugaliknowit

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Re: Sell house after 18 months- pay capital gains- or hold on a bit longer?
« Reply #11 on: September 02, 2014, 07:47:23 AM »
1.  This concerns me:  "Have had tons of showings, lots of interest, but no solid offers, yet".   What is "tons of showings"?

2.  "Most everyone needs to sell their own house first, but we're not interested in contingencies".  Why not?  You want top dollar and require someone step up to the plate without using their current home?  You can always "kick them out" with a kickout clause.

3.  "Of 15 opinions from the agents on a realtor tour at our house, only one said it was a "tad overpriced"; she suggested going to right at $525k".   I wouldn't place much credence to this.