Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
1y
Interesting point. I agree with your assessment.
Another factor keeping older folks in much larger houses are property taxes. In certain states, such as California and Michigan, property tax increases are capped by law. It creates a perverse disincentive to move.
My mom downsized from a $1M house, one her late husband had owned for decades, to a $350,000 condo. Because of Michigan's property tax scheme, her property taxes went up after she moved.
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
1y
Interesting point. I agree with your assessment.
Another factor keeping older folks in much larger houses are property taxes. In certain states, such as California and Michigan, property tax increases are capped by law. It creates a perverse disincentive to move.
My mom downsized from a $1M house, one her late husband had owned for decades, to a $350,000 condo. Because of Michigan's property tax scheme, her property taxes went up after she moved.
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
1. Factor in the transaction costs of 4 sales and 4 buys during that time. Whether you don’t get to keep money because of taxes or because of transaction costs is exactly the same: the money is gone.
2. You get the same long term capital gains in the stock market. Fewer taxes in real estate, though. Why? Because real estate lets you keep $500k tax free.
Taxes are the price we pay for a civilized society. Real estate is taxed lower than most investments
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
1. Factor in the transaction costs of 4 sales and 4 buys during that time. Whether you don’t get to keep money because of taxes or because of transaction costs is exactly the same: the money is gone.
2. You get the same long term capital gains in the stock market. Fewer taxes in real estate, though. Why? Because real estate lets you keep $500k tax free.
Taxes are the price we pay for a civilized society. Real estate is taxed lower than most investments
Our neighbors decided to sell/move whenever they hit 500k gain, and have moved at least 3 times now. They obviously had transaction costs each time, and raised their annual property tax each time as they bought more expensive houses. (yeah, I supposed they could have downsized each time but they didn't... and even if they just purchased an equivalent house it would be more expensive with the same/higher mortgage and higher property tax).
We decided NOT to move, and have had a low property tax all this time but now are faced with over a couple million in gains if we moved today. I don't know which decision is better... I could model it out but it would be an academic exercise because we can't undo the choices we've made.
I also don't know how long we'll stay here and how to exit. The thought of all that dead equity seems unwise, and a massive cap gains bill is unappealing. We'll probably have to rent it out for a couple years and 1031 it to get out.
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
1. Factor in the transaction costs of 4 sales and 4 buys during that time. Whether you don’t get to keep money because of taxes or because of transaction costs is exactly the same: the money is gone.
2. You get the same long term capital gains in the stock market. Fewer taxes in real estate, though. Why? Because real estate lets you keep $500k tax free.
Taxes are the price we pay for a civilized society. Real estate is taxed lower than most investments
Our neighbors decided to sell/move whenever they hit 500k gain, and have moved at least 3 times now. They obviously had transaction costs each time, and raised their annual property tax each time as they bought more expensive houses. (yeah, I supposed they could have downsized each time but they didn't... and even if they just purchased an equivalent house it would be more expensive with the same/higher mortgage and higher property tax).
We decided NOT to move, and have had a low property tax all this time but now are faced with over a couple million in gains if we moved today. I don't know which decision is better... I could model it out but it would be an academic exercise because we can't undo the choices we've made.
I also don't know how long we'll stay here and how to exit. The thought of all that dead equity seems unwise, and a massive cap gains bill is unappealing. We'll probably have to rent it out for a couple years and 1031 it to get out.
Total up all of the saved property taxes plus the saved transaction costs plus personal disruption avoided value plus $500k and compare that number to what your friends paid -- and that assumes they paid long-term capital gains tax as you will.
1031 exchanges just postpone the pain. It is the dying in place that avoids it.
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
I agree with the concepts but the tax law makes people do strange things. If you are going to pay $250k in taxes, many older people will rent their primary, and not sell, then rent somewhere else you can rent at $2k a month for 10 years on what you would pay in taxes. Then die and leave the house to your heirs tax free
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
OP
Redo the math with the deceased spouse dying last year thus 1/2 of the $1.25m gain goes away. Second scenario spouse died say 5 years ago and the gain at that time was say $800k. Again 1/2 the gain at that time goes away. 3rd scenario have both spouses alive and you use the full $500k avoidance.
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
OP to your original point. These houses will come on the market. Whether both spouses die. Both go to a retirement home. At $6,000 to $12,000 per person per month in retirement home depending on their wealth they will need to sell or give away. Govt will not pay the retirement home costs until all of their resources (the home) are used up.
So you’re talking maybe a 10 year lag for a 70 year old to turn 80 and move into a retirement home. Versus a 70 year old choosing not to sell and stay out.
Except for select markets most couples won’t be in the original cost $250,000 with current value of $750,000 (maxing the $500k deduct). Or a significant amount above that. Even at $1mm value and have to pay on $250k above the $500k deduct most people would sell and pay the taxes.
Our house alone without the 30 acres. Cost $200,000. 4,200 sqft say $850k. My spouse and I would still sale after the $500k deduct on the extra $150k gain. Would not let that impact our decision.
The group to me your concern addresses is the high east west coast markets. I think they would still sell. And buy twice the size house somewhere else. Yeh they didn’t like paying the taxes but they got a new house, with a large yard, great neighborhood and twice the size.
I think a lot of sellers get hung up on the capital gains tax unnecessarily. Sometimes paying taxes is a privilege, as in this case. I would not let the tax on this cloud the gain.
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
@Stetson Oates@Henry Clark@Chris Seveney@John Clark. Don't get me wrong but I agree with you about selling. The logical thing is to sell. But as @Stetson Oates mentions they get hung up on the taxes. The logical thing sometimes does not enter their mind. Lower taxes, Lower maintenance, lower utility costs, less cleaning. These should all get factored in but often don't. My mom has a $2mm house with a $150k basis and lives in 1 room with no heat and eats rice. She could easily sell and pay $2k a month in a rental and live a better life, but she has some idea that the kids and grandkids might come 1 X a year and then having a 6 BR house would make them come more often. Sadly we as Americans over consume housing, then are not able to transfer to less. The lucky ones oddly enough in this scenario are those who take multiple steps(houses) to get to the big house, as they have a larger cost basis then those who bought the big house in the nice town at the beginning. When is the optimum time to leave the big house(no pun intended) and downsize? Does anyone have that answer?
@Stetson Oates@Henry Clark@Chris Seveney@John Clark. Don't get me wrong but I agree with you about selling. The logical thing is to sell. But as @Stetson Oates mentions they get hung up on the taxes. The logical thing sometimes does not enter their mind. Lower taxes, Lower maintenance, lower utility costs, less cleaning. These should all get factored in but often don't. My mom has a $2mm house with a $150k basis and lives in 1 room with no heat and eats rice. She could easily sell and pay $2k a month in a rental and live a better life, but she has some idea that the kids and grandkids might come 1 X a year and then having a 6 BR house would make them come more often. Sadly we as Americans over consume housing, then are not able to transfer to less. The lucky ones oddly enough in this scenario are those who take multiple steps(houses) to get to the big house, as they have a larger cost basis then those who bought the big house in the nice town at the beginning. When is the optimum time to leave the big house(no pun intended) and downsize? Does anyone have that answer?
this tends to be a coastal problem and maybe a few other high priced markets like Boulder or Prime Chicago Austin type thing.. the rest of the country its pretty moot. This got me to thinking about our project we built here in Oregon we has a significant amount of buyers out of the 90 homes we built sell bigger homes or mainly OLDER homes to buy a new one and do some down sizing and big thing was quality of home upgrades from a 60 year old home to a brand new one with a few tweaks we do for age in place like zero threshold showers etc. I don't think tax's really came into play for most of these folks as much as you might be thinking. And our price point for most of our empty nesters was 800k to 1 mil.. 2300 sq ft single levels. Stairs is another big factor. And small lot compared to living on the hobby farm of 5 to 20 acres .
I have personally used the 500k exemption 4 times in my lifetime SF bay Area property and Portland metro.. And will use it again later this year to move to NV and for me it is for sure a tax move .. But not in the way your thinking its a tax move for income tax primarily then prop tax.. I will have a cap gain tax when I sell this home above the 500k freebe we get but thats OK.. I mean you have to live somewhere right..
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
1y
where I would run into Tax implications was when I was buying and selling TIMBER Deeds and timber tracts of land.. the average Timber land owner in the PNW has owned their land for decades and or is multi generational. And as we all know Tree's grow well Timber in very good growing sites of the northwest will take 50 to 100 years to mature into merch timber. And said timber goes up in value 12 to 14% a year that's the return on investment by just holding the timber and the reasons the main funders of timber land and big owners are John Hancock and the Harvard Endowment fund.
Although there are plenty of private Timber land owners.. And the demographics of these owners generally was 65 to 95 YO and not at all sophisticated when it comes to RE deals and TOTALLY tax adverse.. So they could be living on the property in a beat up house with a beat up truck that hardly runs and have 1 mil in standing Timber but would not touch it because they dont want to pay cap gain on the harvest.
To that end I put together a nice package for them.. Most did not want to sell the land .. So how to get them to sell the Timber and keep the land.. that was the problem.
Solution buy TIMBER DEED and use the proceeds I paid them for the DEED for a 1031 exchange into an income property that they would pay cash for.. And Now they go to harvest their trees we replanted.. Kept their farm and farm deferral prop taxs and now have a free and clear asset generating monthly income.. Genius right.. Well I pulled that off maybe 3 or 4 times in 9 years.. these owners first could not believe the law allowed that.. So it was a frustrating set of folks to deal with from that aspect.
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
This is interesting but I think the bigger problem that causes housing inventory to remain locked up by seniors is that there is no suitable housing for them to move to. At least in my area that is the case. I hear from empty-nesters all the time that they want to downsize but there are no small, single-level ranches or senior housing (that is reasonably affordable) for them to move in to in any of the areas they want to live. So they stay in the larger house that they raised their families in because there is nowhere for them to move. I have never heard any of them mention capital gains being a factor, always lack of a suitable option to age into. There has only been one new senior housing complex built here in the last 50 years and it is extremely expensive and sold out immediately.
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
Brian, can you explain how you arrived at a capital gains tax of $260,000?
I plugged the numbers into NerdWallet capital gains calculator and the result is as follows:
Your estimated capital gains tax amount is: $177,305
Your estimated total tax amount, including regular taxable income and capital gains, is: $186,658
Here's how much of your long-term capital gain is taxed at 0%: 0
Here's how much of your long-term capital gain is taxed at 15%: $453,900
Here's how much of your long-term capital gain is taxed at 20%: $546,100
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
Brian, can you explain how you arrived at a capital gains tax of $260,000?
I plugged the numbers into NerdWallet capital gains calculator and the result is as follows:
Your estimated capital gains tax amount is: $177,305
Your estimated total tax amount, including regular taxable income and capital gains, is: $186,658
Here's how much of your long-term capital gain is taxed at 0%: 0
Here's how much of your long-term capital gain is taxed at 15%: $453,900
Here's how much of your long-term capital gain is taxed at 20%: $546,100
Did I miss something? Thanks
Assuming NerdWallet calculator is correct, and assuming I fed in the information correctly ( may be a leap of faith on THAT assumption) we have a cap gain tax of $170,000 on $1 million (actually $1.25 million) of profit. Heck, that’s 13.6%! Rates used to be 40% +
There’s a HUGE difference between what people will and won’t due facing a tax of $260k on a $1.25 million gain vs a tax of $170k.
My take is that too many people make the WRONG choice because they don’t want to pay ANY AMOUNT in taxes NOW. This leads to sub par lifestyle choices, and detrimental financial choices.
The best example of this is the people who rather than pay a blended 15% tax on profit when they sell a property go through all gyrations to exchange into another property - not one they want or one that is the highest cash flow or best appreciation potential - no they give all that up just so they can squeeze into the window of time needed to do the 1031 exchange. AND they end up often times paying as much in fees to do the exchange as they would have in taxes.
Here’s a personal example. 10 years ago I decided to “Roth” my solo 401k. My account had about $1,200,000 in it. I discussed it with a good friend of mine, who also had a non Roth solo 401k. We determined that with taking a discount for the non liquid aspect of my portfolio (limited partnership interests) and spreading the conversion over 3 non consecutive years (where I could “appropriate” taxable income to the “non conversion” years, I could end up paying about $240k in taxes for this conversion. I did it (actual taxes paid were $252,000), while my friend just couldn’t bring himself to pull the trigger, bite the bullet, or suffer the psychological pain of paying this much in tax.
The result is that my portfolio is now valued at $4,350,000. Any and all distributions I take are tax free. I could withdraw the entire $4,350,00- and owe NO tax. I am NOT required to take minimum distributions.
My friend, who would not pay the tax, no has to take minimum distributions every year that place him in a higher tax bracken, increases his cost of Medicare, and reduces the amount in his 401k that can earn return. If I hadn’t paid the $250k I would now be liable for over $1,500,000 in taxes as I received distributions, which doesn’t include portfolio value increase.
More people need to handle their finances on proper analytics, not emotion.
There has been growing discussion about how capital gains tax laws are reducing the inventory of homes available for sale in high-appreciation areas. Specifically, homeowners who have lived in their properties for many years may find themselves financially disincentivized from selling due to the tax implications of their appreciated home values.
Consider the following example: A homeowner purchased a house 20 years ago for $250,000. Over time, the home has appreciated to $1.5 million. The homeowner, now older and living alone after the passing of a spouse, would like to downsize to a smaller home or condo that better suits their needs. However, upon selling, they would face a $1.25 million capital gain. Current tax law allows an individual to exclude $250,000 of that gain if they have lived in the home for at least two of the past five years, leaving them with a $1 million taxable gain. With a retirement and Social Security income of $65,000, they could owe approximately $260,000 in long-term capital gains taxes.
By contrast, if that same homeowner had moved every five years, upgrading to a larger home along the way, they would now own a property worth $1 million instead. Their capital gain would be reduced to $500,000, and after the same $250,000 exemption, they would only owe taxes on a $250,000 gain—resulting in a significantly lower tax bill of roughly $55,000.
This discrepancy effectively punishes long-term homeowners who have remained in their properties, disproportionately affecting those who may now find their homes unsuitable due to aging, changing lifestyle needs, or financial strain.
The capital gains tax exemption of $250,000 per person ($500,000 for married couples) has remained unchanged since 1997. If adjusted for inflation, that $500,000 exemption would be approximately $985,000 today. Increasing this threshold would likely encourage more longtime homeowners to sell, freeing up inventory in a housing market that is already struggling with supply shortages.
Revising this outdated exemption would not only provide financial relief to those who need to transition to more suitable housing but also help ease housing shortages by making more homes available to younger buyers. A simple policy update could have a profound effect on housing mobility and affordability, benefiting homeowners and prospective buyers alike.
Brian, can you explain how you arrived at a capital gains tax of $260,000?
I plugged the numbers into NerdWallet capital gains calculator and the result is as follows:
Your estimated capital gains tax amount is: $177,305
Your estimated total tax amount, including regular taxable income and capital gains, is: $186,658
Here's how much of your long-term capital gain is taxed at 0%: 0
Here's how much of your long-term capital gain is taxed at 15%: $453,900
Here's how much of your long-term capital gain is taxed at 20%: $546,100
Did I miss something? Thanks
Assuming NerdWallet calculator is correct, and assuming I fed in the information correctly ( may be a leap of faith on THAT assumption) we have a cap gain tax of $170,000 on $1 million (actually $1.25 million) of profit. Heck, that’s 13.6%! Rates used to be 40% +
There’s a HUGE difference between what people will and won’t due facing a tax of $260k on a $1.25 million gain vs a tax of $170k.
My take is that too many people make the WRONG choice because they don’t want to pay ANY AMOUNT in taxes NOW. This leads to sub par lifestyle choices, and detrimental financial choices.
The best example of this is the people who rather than pay a blended 15% tax on profit when they sell a property go through all gyrations to exchange into another property - not one they want or one that is the highest cash flow or best appreciation potential - no they give all that up just so they can squeeze into the window of time needed to do the 1031 exchange. AND they end up often times paying as much in fees to do the exchange as they would have in taxes.
Here’s a personal example. 10 years ago I decided to “Roth” my solo 401k. My account had about $1,200,000 in it. I discussed it with a good friend of mine, who also had a non Roth solo 401k. We determined that with taking a discount for the non liquid aspect of my portfolio (limited partnership interests) and spreading the conversion over 3 non consecutive years (where I could “appropriate” taxable income to the “non conversion” years, I could end up paying about $240k in taxes for this conversion. I did it (actual taxes paid were $252,000), while my friend just couldn’t bring himself to pull the trigger, bite the bullet, or suffer the psychological pain of paying this much in tax.
The result is that my portfolio is now valued at $4,350,000. Any and all distributions I take are tax free. I could withdraw the entire $4,350,00- and owe NO tax. I am NOT required to take minimum distributions.
My friend, who would not pay the tax, no has to take minimum distributions every year that place him in a higher tax bracken, increases his cost of Medicare, and reduces the amount in his 401k that can earn return. If I hadn’t paid the $250k I would now be liable for over $1,500,000 in taxes as I received distributions, which doesn’t include portfolio value increase.
More people need to handle their finances on proper analytics, not emotion.
I am doing the same thing but more conservative than you. I am doing $300k/year conversion. The issue is the last 2 years have been a wash meaning the Ira balance is virtually the same as it was before I did the transfers. That is definitely a good problem to have but does not appear that I will have the same issue in 2025 (meaning my gains in my Ira account are unlikely to be as much as $300k for 2025).
I agree with your rationale, but I have the problem that many of the posts indicate that I do not want to pay a high percent in taxes even though it may be the better long term financial decision.
Note if tax laws are changed to reduce the high tax consequences, I plan to make use of the benefit. If the tax rules stay the same, I will likely convert another $300k each year and realize it may take many years to convert all the Ira to Roth.
Even though I am not aggressive as you were, I believe you made the right decision and wonder if me not biting the bullet (doing the conversion in fewer years) will end up costing me more than if I did the conversion over a few years. Time will tell.
certainly something to contemplate (I clearly have already contemplated it, but still question if my path is not aggressive enough).
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
Most states are taxing the CAP Gains as income for another 5%, then you have millionaires tax in MA as well. And then there is the Obamacare tax. The actual tax amount is often not the issue, it is the principal. These are folks who have never had a $50k annual tax bill, so this is unbearable for them. Also, many have pensions and have never even touched their nest egg.
Most states are taxing the CAP Gains as income for another 5%, then you have millionaires tax in MA as well. And then there is the Obamacare tax. The actual tax amount is often not the issue, it is the principal. These are folks who have never had a $50k annual tax bill, so this is unbearable for them. Also, many have pensions and have never even touched their nest egg.
“Unbearable?”
They’re getting a half-million tax break that no other investment gets. Now the rest of us are supposed to pay higher taxes on other income so we can cater to their unreasonable whims? Nope.
I say this as someone who is in this age group and will have this problem soon. Personally, I think that we are being grossly unfair to younger people, and we should immediately get rid of the $500k exclusion and not allow interest deductions on the portions of mortgages over $500k.
Let the prices collapse to affordable levels, the government will eventually pay for your nursing home when you’ve spent down anyway. Just sooner rather than later.
Most states are taxing the CAP Gains as income for another 5%, then you have millionaires tax in MA as well. And then there is the Obamacare tax. The actual tax amount is often not the issue, it is the principal. These are folks who have never had a $50k annual tax bill, so this is unbearable for them. Also, many have pensions and have never even touched their nest egg.
The average state tax on capital gains is 4.65 %. So on a $1 million capital gain that’s another $46,500. The 3.8% tax is on investment income over $250k for a single filer. So that’s another $28,500.
Total $252,305. Right YOU are. Good analysis. Sneaky state and Medicare. I reside in Texas, no income taxes.
Most states are taxing the CAP Gains as income for another 5%, then you have millionaires tax in MA as well. And then there is the Obamacare tax. The actual tax amount is often not the issue, it is the principal. These are folks who have never had a $50k annual tax bill, so this is unbearable for them. Also, many have pensions and have never even touched their nest egg.
“Unbearable?”
They’re getting a half-million tax break that no other investment gets. Now the rest of us are supposed to pay higher taxes on other income so we can cater to their unreasonable whims? Nope.
I say this as someone who is in this age group and will have this problem soon. Personally, I think that we are being grossly unfair to younger people, and we should immediately get rid of the $500k exclusion and not allow interest deductions on the portions of mortgages over $500k.
Let the prices collapse to affordable levels, the government will eventually pay for your nursing home when you’ve spent down anyway. Just sooner rather than later.
Social engineering and well as economy management drives government to tax different income, age groups, etc differently. The results are always economic distortion. Why are college tuition in the U.S. double or more than Europe? Because of government student loans. Why are home prices so high? Because government restrictions on building. There’s no such thing as good” government. There’s BIG government and SMALL government, but while government may in certain instances be necessary, it’s NEVER as efficient, or beneficial as the free market.
You are right to be PISSED. My generation has left your generation with a huge debt, reckless government spending, and legislation favoring boomers at the expense of younger people.
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
@Don Konipol sadly the taxes are quite burdensome in MA, need to find my next landing spot, still waiting for my kids to settle down, right now i have NJ, MD and FL, we will see where we end up. For the normal people out there, the key is to keep track of all improvements on your primary so you have a higher basis.
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
@John Clark I hear you, and i think the tax laws are all messed up and they have created perverse incentives for folks. There is talk to increase this "tax loophole" is that good or bad? Perhaps we should stop incentivizing home ownership, perhaps not. I think just like any other tax policy it makes people do odd things. Should we have the 1031 exemption either? Should we be able to deduct the interest on our houses and second homes? Should we be able to take depreciation on an asset that is likely going up in value? Maybe it is time to re-evaluate these breaks, as I do think they are having an adverse impact both on the housing market in general, and the young as well. Many of you out there who have kids are likely saying you need to get more houses for your kids, since it is so hard for them to get them for themselves. Another sob story in Boston if you make $400k and want to get a $1mm house you end up with an 1600 SF 3 BR 1 BA 1960s house with no renovations if you want to be less than a 35 minute drive to work. But you can make $400k! So what do these folks do? Sometimes they buy a much more expensive house then they can afford(why not) and that "takes away the cheaper houses from those who don't make as much money". Not sure if it is right or wrong, but it is the cards that we have been dealt, and people are playing the game with the rules they are given until they change.
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
1y
@Brian J Allen my "Greed Impulse" agrees and loves this. It's says I want all the profits and none of the expenses.
My "Inner Citizen" says suck it up buttercup, be thankful to have profits to be taxed and taxes are the cost of living in a first world nation. It's how we have all the things we like, cause somebody's gotta pay for em or you don't have them.
Your pretext to this is false though. That cap gains is "Limiting Housing Inventory".
In your example if, if, if, then a person would sell to buy an other unit. That's not an increase to inventory, that's a net-0. Buy to sell is add one to remove one.
But what I do see here is agents, who let's be honest are starving in mass for transactions, being the biggest winner from inducing increase to transactional volume.
There is only 2 things that will increase inventory:
(a) add inventory ie build.
(b) more people dying than being born/ immigrating.
That's it, more units for the # of demand or less demand to better fit the supply.
A scheme to fluff an investment segment to have a "free-pass" on profits, as much as my greedy devil on shoulder would love that, my thinking half knows that every time anything of the sort has been effected really bad consequences followed. For example NINJa financing.
Fact is this is how our society runs, taxes on gains. Investment gains, income gains, just how it works.
Every time a change of system say to sales tax, people get up in arms.
Well, fact is the $ has to come from somewhere. Pick a path....
@Brian J Allen my "Greed Impulse" agrees and loves this. It's says I want all the profits and none of the expenses.
My "Inner Citizen" says suck it up buttercup, be thankful to have profits to be taxed and taxes are the cost of living in a first world nation. It's how we have all the things we like, cause somebody's gotta pay for em or you don't have them.
Your pretext to this is false though. That cap gains is "Limiting Housing Inventory".
In your example if, if, if, then a person would sell to buy an other unit. That's not an increase to inventory, that's a net-0. Buy to sell is add one to remove one.
But what I do see here is agents, who let's be honest are starving in mass for transactions, being the biggest winner from inducing increase to transactional volume.
There is only 2 things that will increase inventory:
(a) add inventory ie build.
(b) more people dying than being born/ immigrating.
That's it, more units for the # of demand or less demand to better fit the supply.
A scheme to fluff an investment segment to have a "free-pass" on profits, as much as my greedy devil on shoulder would love that, my thinking half knows that every time anything of the sort has been effected really bad consequences followed. For example NINJa financing.
Fact is this is how our society runs, taxes on gains. Investment gains, income gains, just how it works.
Every time a change of system say to sales tax, people get up in arms.
Well, fact is the $ has to come from somewhere. Pick a path....
Or we could institute a law that recognizes inflation as to add to the cost basis of an asset.
@Brian J Allen my "Greed Impulse" agrees and loves this. It's says I want all the profits and none of the expenses.
My "Inner Citizen" says suck it up buttercup, be thankful to have profits to be taxed and taxes are the cost of living in a first world nation. It's how we have all the things we like, cause somebody's gotta pay for em or you don't have them.
Your pretext to this is false though. That cap gains is "Limiting Housing Inventory".
In your example if, if, if, then a person would sell to buy an other unit. That's not an increase to inventory, that's a net-0. Buy to sell is add one to remove one.
But what I do see here is agents, who let's be honest are starving in mass for transactions, being the biggest winner from inducing increase to transactional volume.
There is only 2 things that will increase inventory:
(a) add inventory ie build.
(b) more people dying than being born/ immigrating.
That's it, more units for the # of demand or less demand to better fit the supply.
A scheme to fluff an investment segment to have a "free-pass" on profits, as much as my greedy devil on shoulder would love that, my thinking half knows that every time anything of the sort has been effected really bad consequences followed. For example NINJa financing.
Fact is this is how our society runs, taxes on gains. Investment gains, income gains, just how it works.
Every time a change of system say to sales tax, people get up in arms.
Well, fact is the $ has to come from somewhere. Pick a path....
Or we could institute a law that recognizes inflation as to add to the cost basis of an asset.
That makes perfect sense, but think of the Pandoras box it opens.
It could be seen as setting a precedence.
It also opens to door to deflation utilization.
Keep in mind how bad big gov operates in any sphere of thinking. They love there standardized formats, templates, check lists etc.. Thinking and applied intelligence has never been there strong suit.
Not to mention, how is inflation calculated? Keep in mind how much just that simple one of what is inflation has been a point of contention and also with many let's call it "interesting" notions of how one calculates what is inflation rate.
yep good point about the markets this impacts. one corollary - as i've pointed out in other threads, a lot of lower priced inventory in rust belt markets is sitting vacant because the owners have no mortgage but aren't willing to sell unless they get absolute top dollar. the pain of paying taxes yearly isn't enough to force them to do anything.
@Brian J Allen so this like the inverse of your point - in expensive markets, the potential high capital gains tax bill disincentivizes selling, and in the cheaper markets the real estate taxes are too low to incentivize it. all of this adds up i think to the inventory shortage that we're in.
and @Steve K. totally agree with you. builders near me are putting up luxury single level patio homes at 2x the median price and there is tremendous, tremendous demand for them - they can't build enough.
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
@James Hamling I feel you on this. I still believe in my premise that taxes are Limiting Housing Inventory. I will try to flesh this out a bit. First, my mom lives in a 6BR 3 BA house with 1 person. I realize if she "downsizes" that is a 1 to 1 with a net zero increase in supply. However, as you mention we need more supply. As you are likely aware it is much easier to produce small houses on small lots then larger houses. You likely also agree that builders would rather build a big house then a small house as they typically make more money.
Imagine that there is now an increase in the supply of big houses, builders would likely turn to building something else say smaller houses. Is this good, or is this bad? The reality is that 1 generation ago it was easier to trade up and trade down in house size in the same community. That is not as easy to do anymore. Many communities see folks tear down the small houses, and replace them with larger ones, as it is ultimately the land that has the value no necessarily the house.
I'm sure we could go much deeper into this scenario, and maybe get more good ideas, but the reality is that every time grandma stays in a large house by herself, and a family looks for a bigger house that is not there, the market says to build bigger houses.
If grandma had a good place to go, maybe a small house village, over 55 community in the same town/area, it frees up those existing larger houses for those who need(loaded word)/desire them.
But the way the market has gone, people see the leverage they can get on the big house and decide to buy the most expensive house they can buy (say $1mm) because a 10% annual increase on $1mm is much more than 10% increase on $500k (the size house they may have been happy with).
It is time for houses to be houses, but they are seen by many(most) as an investment vehicle.
@James Hamling I feel you on this. I still believe in my premise that taxes are Limiting Housing Inventory. I will try to flesh this out a bit. First, my mom lives in a 6BR 3 BA house with 1 person. I realize if she "downsizes" that is a 1 to 1 with a net zero increase in supply. However, as you mention we need more supply. As you are likely aware it is much easier to produce small houses on small lots then larger houses. You likely also agree that builders would rather build a big house then a small house as they typically make more money.
Imagine that there is now an increase in the supply of big houses, builders would likely turn to building something else say smaller houses. Is this good, or is this bad? The reality is that 1 generation ago it was easier to trade up and trade down in house size in the same community. That is not as easy to do anymore. Many communities see folks tear down the small houses, and replace them with larger ones, as it is ultimately the land that has the value no necessarily the house.
I'm sure we could go much deeper into this scenario, and maybe get more good ideas, but the reality is that every time grandma stays in a large house by herself, and a family looks for a bigger house that is not there, the market says to build bigger houses.
If grandma had a good place to go, maybe a small house village, over 55 community in the same town/area, it frees up those existing larger houses for those who need(loaded word)/desire them.
But the way the market has gone, people see the leverage they can get on the big house and decide to buy the most expensive house they can buy (say $1mm) because a 10% annual increase on $1mm is much more than 10% increase on $500k (the size house they may have been happy with).
It is time for houses to be houses, but they are seen by many(most) as an investment vehicle.
More to come
I get it Brian, I do.
Look, I can summarize with this simple intrinsic truth:
Freedom isn't Free.....
What you explain here makes perfect sense to me. Take Big Gov. actions to impress actions of Social Engineering. To press those as you describe to down-size in housing to "make way' for the younger ones to more easily move-up in their housing.
I get it, I am also Norwegian, a natural instinct deep inside really gravitates to this and values it. But I know, that is my innate inner Scandinavian Socialist speaking to me.
Americans say you hate Socialism, pride in liberty, freedom and free market economics....
Yet you speak of and champion very VERY socialist actions and motives.
Look, I personally am a fan of a Socialist Republic, I am. I think there can be a beautiful balance there. Again, I am Norwegian. But it's not "American", it just isn't.
To get these socialist things, there is a cost. Nothing comes for free, everything has a price.
Is Scandinavia consistently the happiest place on earth to live, heck yeah, the #'s don't lie. Do you get such social engineering, yup, and it works.
BUT.... the cost..... You also do not have parabolic wealth as have in USA. It's not just harder to become a billionaire, it's all but impossible, by design. It's sacrificing the extreme wealth, to eliminate extreme poverty, to achieve a massive middle.
And to do this means a loss of "liberties" to exist in either extreme. A loss of choice to exist in either.
So at the heart of things this is what your proposing and entertaining, eliminating degrees of Freedom & Liberty.
Your singularly focusing on what you have to gain at the moment for such, and acting in ignorant bliss of what the cost will be to achieve such.
Everything, EVERYTHING has a price. To gain a thing will require sacrificing another.
Freedom and Liberty is an 80yr old sitting in there 5 bedroom 3,500sqft home using a mere fraction of the place simply because they choose to. That is "Freedom & Liberty" in action.
And the cost of such Freedoms & Liberties is the younger family who want the old koot's place, well they simply don't get to press the old timer out.
The notion that "oh-no" the old timer will have to pay $250k on the flipping million dollars in cash there getting is ridiculous on face value. They still have $750k cash in there hand they didn't have before. How can one spin that as a discouraging?
That same logic could be used to argue people are starving because of sales tax on McDonalds......
If I want to live in Socialist systems, I will simply move to Scandinavia. I am here, by choice. I choose Freedom & Liberty for all it's imperfections because only when there is unrestricted opportunity to fail and make bad choices, is there equally unbridled opportunity to succeed and make good positive choices.
I accept this cost of Freedom. I roll the dice on myself. If I wanted someone to dictate how I can live, I have no shortage of places I can obtain that living. Let's not add this nation as another.
Real Estate Agent · Worcester, MA · Member since 2018 · 517 posts · 409 votes
1y
@James Hamling Perhaps I am too lengthy in my response. I believe the government needs to get out of housing and let things be as they may.
The issues are not caused by the 80 year old lady, she is just acting rationally based on the information provided to her. Most of the issues that we see are caused by intervention by the government. By the government trying to "nudge" us to do certain things. They may be good intentioned, but good intentions do not necessarily create good outcomes.
My mom derives great pleasure from having the choice to keep her big house and look out at the water. But she gets greater pleasure by not paying the taxes.
I do not champion anything. I am simply pointing out that the government and its tax code has caused these issues. I don't think additional changes will make things better.
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
OP. Who cares. Our first flight had mechanical problems. Our new flight the gate doesn’t work and they can’t unload the passengers.
Most older people are more worried about losing the ability to drive or leaving their neighborhood or their base of community. Taxes on their house doesn’t matter that much.
To get them to sale. Show them the numbers. Show them the dream.
The dream
Belize- basically zero income, property or capital gain tax. They make their money on tariffs. You still have to do US tax return.
Montecatini, Italy- spa capital of Italy. 30% down, 30 year fixed, 2.7% interest. With inflation you’re basically living for free. . They will still want to keep living where they are.
Boston, MA · Member since 2017 · 84 posts · 42 votes
1y
@Brian J Allen Thanks for posting this, great to hear different perspectives on this issue! Funny, I was advising a friend heading into retirement on your exact same question and we came up with a solution that hasn't been discussed yet. They've lived outside of San Francisco in an extremely HCOL area for the past 30 years. I would estimate they're looking at cap gains in the range of 2-2.5M when they sell, and this is just a traditional SF home. What we decided is to have them rent the space for at least two years (there's no mortgage so this is nice income for them) and then after that make the decision to sell OR 1031 since it's technically an investment property and they've lived in it for 2 out of the last 5 years. It looks like there may be ways to utilize both the primary residence exclusion and a 1031, but we'll talk to a CPA down the road about that (or if anyone here has insight on that please let me know).
@Brian J Allen Thanks for posting this, great to hear different perspectives on this issue! Funny, I was advising a friend heading into retirement on your exact same question and we came up with a solution that hasn't been discussed yet. They've lived outside of San Francisco in an extremely HCOL area for the past 30 years. I would estimate they're looking at cap gains in the range of 2-2.5M when they sell, and this is just a traditional SF home. What we decided is to have them rent the space for at least two years (there's no mortgage so this is nice income for them) and then after that make the decision to sell OR 1031 since it's technically an investment property and they've lived in it for 2 out of the last 5 years. It looks like there may be ways to utilize both the primary residence exclusion and a 1031, but we'll talk to a CPA down the road about that (or if anyone here has insight on that please let me know).
This is a great problem to have but it has its issues.
As you said check with their CPA.
IRS doesn’t allow 1031 on primary so they can’t also take the 2 year primary deduction.
Say $500k forever versus $2mm avoidance. The $2mm sounds best up front. However if they do the 1031, they will need to do the full amount or the difference will be treated as 100% taxable income. If value is $2.5mm and they buy a 1031 property for $1.5mm the $1mm difference will be taxable at 100%. To avoid that they would need to buy a property for $2.5mm or higher. The problem with that is no money left for their new home. Unless they want to live in an apartment in their new purchase.
Definitely discuss with a cpa or financial advisor who knows their entire financial and personal story.
@Brian J Allen Thanks for posting this, great to hear different perspectives on this issue! Funny, I was advising a friend heading into retirement on your exact same question and we came up with a solution that hasn't been discussed yet. They've lived outside of San Francisco in an extremely HCOL area for the past 30 years. I would estimate they're looking at cap gains in the range of 2-2.5M when they sell, and this is just a traditional SF home. What we decided is to have them rent the space for at least two years (there's no mortgage so this is nice income for them) and then after that make the decision to sell OR 1031 since it's technically an investment property and they've lived in it for 2 out of the last 5 years. It looks like there may be ways to utilize both the primary residence exclusion and a 1031, but we'll talk to a CPA down the road about that (or if anyone here has insight on that please let me know).
This is a great problem to have but it has its issues.
As you said check with their CPA.
IRS doesn’t allow 1031 on primary so they can’t also take the 2 year primary deduction.
Say $500k forever versus $2mm avoidance. The $2mm sounds best up front. However if they do the 1031, they will need to do the full amount or the difference will be treated as 100% taxable income. If value is $2.5mm and they buy a 1031 property for $1.5mm the $1mm difference will be taxable at 100%. To avoid that they would need to buy a property for $2.5mm or higher. The problem with that is no money left for their new home. Unless they want to live in an apartment in their new purchase.
Definitely discuss with a cpa or financial advisor who knows their entire financial and personal story.
also I am thinking Henry that if the basis is super low even though they do the 1031 they are not going to get depreciation . I had this happen when I sold a parcel I owned in Sonoma County that I paid 27k for then sold for 2.2 a few years back I did the 1031 but there is NO depreciation since I had bascially a zero basis.. Being Born and raised in the SF Bay Area myself Cupertino and Palo Alto.. there are many that paid 100k to 200k for props in the 80s and if sold today 2.5 to 5 mil .. So they will I believe ( and I could be wrong on this of course) they will get the 10 31 break but get no on going depreciation ??
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
1y
@Brian J Allen,@Henry Clark hit on the greatest solution that's already in place. And works perfectly with natural aging. Many people want to down size transitionally as they age. The 6 bedroom house is too big. but there's so much gain in the 6 BR house that they would owe a lot of tax over the $500K primary residence exclusion. This is where a 1031 exchange can bridge the gap.
First they have to convert that property to an investment property. This would require that they find their next house first and move into it. A year later they sell their old primary residence and do a 1031 exchange because it is now an investment property. They still get the first $500k tax free. And the 1031 exchange defers the rest of the tax. The 1031 doesnt have to buy bricks and mortar that would require management. It could buy Delaware Statutory Trusts, or oil gas interests, or real estate syndications that would allow for tenants in common. All of these are passive and don't change their life negatively. But they all require that they give up control. And I find that is the biggest hindrance from more mature folks 1031ing into passive investments.
I've talked to a lot of people over the years who would rather pay $300K in tax and have $1.2 mil left in cash than go through the work of eliminating that $300K. It's a trade off. But the mechanism exists right now.
@Brian J Allen,@Henry Clark hit on the greatest solution that's already in place. And works perfectly with natural aging. Many people want to down size transitionally as they age. The 6 bedroom house is too big. but there's so much gain in the 6 BR house that they would owe a lot of tax over the $500K primary residence exclusion. This is where a 1031 exchange can bridge the gap.
First they have to convert that property to an investment property. This would require that they find their next house first and move into it. A year later they sell their old primary residence and do a 1031 exchange because it is now an investment property. They still get the first $500k tax free. And the 1031 exchange defers the rest of the tax. The 1031 doesnt have to buy bricks and mortar that would require management. It could buy Delaware Statutory Trusts, or oil gas interests, or real estate syndications that would allow for tenants in common. All of these are passive and don't change their life negatively. But they all require that they give up control. And I find that is the biggest hindrance from more mature folks 1031ing into passive investments.
I've talked to a lot of people over the years who would rather pay $300K in tax and have $1.2 mil left in cash than go through the work of eliminating that $300K. It's a trade off. But the mechanism exists right now.
one of my clients in los Altos hills did what your describing.. dont know what he 1031 into but I know he did the 500k and the 1031 as you described.
