All Forum Posts by: Henry Clark

OP it’s amazing what you think about when you’re out harvesting your cassava or yucca in the heat.

Run the numbers with them. Throw in property tax as mentioned before and insurance.  Old house versus say smaller new home.  

We are in the country side in Iowa.  4,200 sqft on 30 acres.   Acres is taxed very little.  Say $6k property tax and $5k insurance.  Would think if they are older they would go for a smaller house.  We will.   Thus the above are high.   Take their current figures and see what the annual difference is.  Unless grandfathered as noted in a post above.  Their costs should be a lot higher.  

Another reason for them to sale and leave since this comes out of their annual income.  

Tell them my guys will build a 1,200 square foot house in Belize for $30,000 if they own the land and run the utilities.  Property taxes will be about $100, almost zero income taxes and no Capital gain taxes.  The government earns most of its money off of tariffs.  

@Dave Foster.  Thanks for input.  

Quote from @Tyler Munroe:

@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.  

Quote from @Ken M.:

Quote from @Henry Clark:

OP. Evaluate the downside of both markets.  The last major economic downturn AZ (general statement) lost 1/2 their value.  Don’t know about NC. 

You said: "The last major economic downturn AZ (general statement) lost 1/2 their value"
while true, is irrelevant and misleading.

Hmmm, you don't keep up on the news, eh?

Technology

Taiwanese chipmaker TSMC announces new $100B investment in US

CEO C.C. Wei credited President Donald Trump for the investments, which will include a new Arizona R&D center.

TSMC CEO C.C. Wei credited President Donald Trump for the projects, which will include a new Arizona R&D center — a critical part of the technology supply chain that the company has never moved outside of Taiwan.

“We have to thank President Trump’s vision and his support,” Wei said. “TSMC started the journey of establishing the advanced chip manufacturing in Arizona. And now, let me proudly say the vision becomes reality.”

The first of its Arizona factories has been mass-producing chips since last month. Wei said Monday the plant is employing 3,000 workers.

@ken m. There are 1.65mm people in Phoenix.  3,000 new jobs plus say an extra 1,000 support doesn’t move the needle on my suggestion.

My suggestion to the OP is still relevant and thoughtful.  Compare both markets but also look at their downside.

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.  

Quote from @Michael Plaks:

Of course it is a CPA issue! Everything is a CPA issue. They are evil and an impediment to making money. If not for those rotten CPAs, we could deduct everything, including dog food and CrossFit memberships, pay zero taxes and finally be happy. Can't stand them.

Now, with this accumulated anger off of my chest, we can talk about your actual question. And what was that? Oh yes, double-entry accounting... Also evil, by the way.

If your real estate business is filed as part of your personal tax return, which would be the case without an LLC or with a single-member LLC, then double-entry accounting and Balance Sheet are not needed. KISS.

If your real estate business is operated via a partnership or a corporation, and they file their own tax return - then yes, your tax return must include a proper Balance Sheet. You can produce it three ways:
1. Ongoing double-entry bookkeeping. Stessa cannot do that. Plus, it would require you understanding double-entry bookkeeping. Most investors don't, resulting in messy and useless QuickBooks reports.
2. After-the-fact double-entry reconstruction. As your CPA said, it's labor-intensive and expensive.
3. Generating a Balance Sheet without full reconstruction. Still costs money but less than the previous option.

By the way, QuickBooks could be used for your NOI/cash flow tracking, with some effort and modifications. Granted, QB was created for accountants, not for investors.

Loved both parts of your answer.  Grins and giggles , and the technical.   

OP. Evaluate the downside of both markets.  The last major economic downturn AZ (general statement) lost 1/2 their value.  Don’t know about NC. 

OP ditch the C Corp.  Why do you want to pay taxes twice?  

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.  

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.