4 ms·

I own a 1br condo in the Bay Area that I purchased as an investment. I've considered selling but the very high transaction fees are a big deterrent. Consider:

I own a 1br condo in the Bay Area that I purchased as an investment. I've considered selling but the very high transaction fees are a big deterrent. Consider: 7% typical agent + escrow fee (3% buyer, 3% seller, 1% escrow). May be able to get as low as 5% ~15% capital gains tax ~10% CA income tax Even on a sale of a 1br condo, these fees can add up to $50-100k depending on the purchase price and net gain. That's quite a chunk of change! Enough to make one keep the unit on rental market

withdavidli 9y ago
posted this below. know your tax exemptions: http://www.bankrate.com/finance/taxes/capital-gains-and-your-home-sale-1.aspx http://www.bankrate.com/finance/taxes/capital-gains-and-your... agent fees is a big reason that I don't buy a house. unless you're in a booming market it's tough to make back that fee.
- fictioncircle 9y ago
  Its not difficult if you buy something similar size to what you are renting and hold it for 5+ years. The tax credits, inflation working in your favor (instead of against) alone is generally enough to cover the fee after 5 years.
  - snikeris 9y ago
    Surprisingly, only 63% of homeowners itemize their deductions (which is how you take the mortgage interest deduction). The tax benefits of home ownership is sometimes overstated. https://www.nahb.org/en/research/housing-economics/special-studies/archives/mortgage-interest-and-real-estate-tax-deductions-policy-issues-2008.aspx https://www.nahb.org/en/research/housing-economics/special-s...
    - brewdad 9y ago
      That same article states that 94% of mortgage interest gets itemized and that 32% of homeowners have paid off their mortgages. The mortgage interest deduction helps most homeowners, at least until they are no longer paying any interest.
    - fictioncircle 9y ago
      63% is still a clear majority and for the people in CA its a non-negligible thing. The 37% are mainly rural/midwest where the houses are under $500k.
stupidhn 9y ago
>but the very high transaction fees are a big deterrent. You've succinctly described why so many parties have a vested interest in sustaining any housing bubble. Many palms getting greased along the way, and very few people who benefit form the implosion.
jrochkind1 9y ago
So you purchased a condo you don't live in as an investment in area where few but the super rich can even afford to own their own homes, and now you find, not that you'll take a loss if you sell it, but that you won't make as much money as you'd like (because of perfectly standard fees and taxes that were standard when you bought the place too), and can make more money renting it out instead... ...you're not looking for sympathy, are you?
- acover 9y ago
  He was explaining his relevant perspective on the issue.
- mancerayder 9y ago
  He's explaining why it's preferable for him to keep it on the rental market. The question of sympathy feels almost vindictive. He's explaining the economics of his decision-making, presumably because implicitly others in his position will draw similar conclusions with regards to rent v sell. Yes, the economics here leads to a lower supply of inventory for sale.
- diamondlovesyou 9y ago
  What? His success reflects nothing on anyone else and doesn't have anything to do with sympathy. He/her is saying that current real estate rules aren't helping incentivize rational decisions to sell. Why would anyone do something that results in a worse (read: not the best) outcome for them?
  - jrochkind1 9y ago
    Sure, I suppose we could tax rental income higher, and incentivize rational decisions to sell investment property.
ChuckMcM 9y ago
I completely understand your dilemma. In 1999 I was looking at my Sun stock which, if I had sold it, I was going to pay probably close to 35% of its sale value in tax. I sat on it. Just before the Oracle sale when it did a reverse split to get back over $10 a share I sold it for less than 5% of its value from 1999. That taught me a very painful but very solid lesson. You take profits because they are profits, not taking them puts them at risk. When Facebook went public its stock went down. When it got to about 1/2 its opening price I bought some. When the value of that holding doubled (100% return less taxes) I sold it. Had I kept it I would have more now, the profits from that sale helped fund a purchase of some Tesla, which I sold when it doubled in value. Which has helped in other purchases. Translating that back to your situation, if you're in real estate and you have some solid gains, consider selling, getting the gains and then re-investing in additional real estate to continue to ride the bubble. By taking out profits over time you may not make as much as you could but you also won't lose as much as you could.
- maxerickson 9y ago
  Translating that back to your situation, if you're in real estate and you have some solid gains, consider selling, getting the gains and then re-investing in additional real estate to continue to ride the bubble. By taking out profits over time you may not make as much as you could but you also won't lose as much as you could. There is always the possibility you will lose more by moving the funds. Like if Facebook had fizzled, that move would have lost you money.
  - ChuckMcM 9y ago
    I think it is a bit more nuanced than that. You can always lose all the value in an uninsured investment. But you can't lose "more" than your initial investment if you take profits and move to another investment. The worst case is you lose the amount of your initial investment minus any profit you took out. You could have the situation you by 100 of A at $10, for $1,000. Then you sell it when it goes up to $15, and after paying fees/taxes keep $250, then invest the $1,000 in B at $10 each. And B craters and you lose all of the value in B. In that scenario you lost $750. ($1,000 lost in B, $250 gained in profits from A). Now its true that A could continue on its path to $20, and had you kept it you would have instead made a profit of say $750 after taxes and still have your $1,000. What I learned in 1999 was that that is not a good strategy. But it is the first strategy that everyone sticks with it seems (and certainly I was holding on to!), "Hey this has doubled in 5 years, in another five it will double again!". And part of my thinking was "Gee if I sell it I'll have to pay all these taxes, I'd much rather think of my self as having a net worth of $x rather than $0.66x." Lesson learned.
fictioncircle 9y ago
Most of which is not true for the average homeowner that isn't investing as they are immune to capital gains and income tax due to the homeowner exclusion. So they eat ~8% (tops). Landlords have to buy and hold because they eat the taxes. Redfin caters primarily to homeowners so you aren't really their target market.
anigbrowl 9y ago
Appreciation will presumably cover your transaction fees after a year or two in that particular market, and capital gains are levied against your profit. As others have pointed out, these things are predictable overhead in real estate investment. Being liable for a lot of tax is a good problem to have in this context.

withdavidli 9y ago

posted this below. know your tax exemptions: http://www.bankrate.com/finance/taxes/capital-gains-and-your-home-sale-1.aspx http://www.bankrate.com/finance/taxes/capital-gains-and-your... agent fees is a big reason that I don't buy a house. unless you're in a booming market it's tough to make back that fee.

fictioncircle 9y ago
Its not difficult if you buy something similar size to what you are renting and hold it for 5+ years. The tax credits, inflation working in your favor (instead of against) alone is generally enough to cover the fee after 5 years.
- snikeris 9y ago
  Surprisingly, only 63% of homeowners itemize their deductions (which is how you take the mortgage interest deduction). The tax benefits of home ownership is sometimes overstated. https://www.nahb.org/en/research/housing-economics/special-studies/archives/mortgage-interest-and-real-estate-tax-deductions-policy-issues-2008.aspx https://www.nahb.org/en/research/housing-economics/special-s...
  - brewdad 9y ago
    That same article states that 94% of mortgage interest gets itemized and that 32% of homeowners have paid off their mortgages. The mortgage interest deduction helps most homeowners, at least until they are no longer paying any interest.
  - fictioncircle 9y ago
    63% is still a clear majority and for the people in CA its a non-negligible thing. The 37% are mainly rural/midwest where the houses are under $500k.

stupidhn 9y ago

>but the very high transaction fees are a big deterrent. You've succinctly described why so many parties have a vested interest in sustaining any housing bubble. Many palms getting greased along the way, and very few people who benefit form the implosion.

jrochkind1 9y ago

So you purchased a condo you don't live in as an investment in area where few but the super rich can even afford to own their own homes, and now you find, not that you'll take a loss if you sell it, but that you won't make as much money as you'd like (because of perfectly standard fees and taxes that were standard when you bought the place too), and can make more money renting it out instead... ...you're not looking for sympathy, are you?

acover 9y ago
He was explaining his relevant perspective on the issue.
mancerayder 9y ago
He's explaining why it's preferable for him to keep it on the rental market. The question of sympathy feels almost vindictive. He's explaining the economics of his decision-making, presumably because implicitly others in his position will draw similar conclusions with regards to rent v sell. Yes, the economics here leads to a lower supply of inventory for sale.
diamondlovesyou 9y ago
What? His success reflects nothing on anyone else and doesn't have anything to do with sympathy. He/her is saying that current real estate rules aren't helping incentivize rational decisions to sell. Why would anyone do something that results in a worse (read: not the best) outcome for them?
- jrochkind1 9y ago
  Sure, I suppose we could tax rental income higher, and incentivize rational decisions to sell investment property.

ChuckMcM 9y ago

I completely understand your dilemma. In 1999 I was looking at my Sun stock which, if I had sold it, I was going to pay probably close to 35% of its sale value in tax. I sat on it. Just before the Oracle sale when it did a reverse split to get back over $10 a share I sold it for less than 5% of its value from 1999. That taught me a very painful but very solid lesson. You take profits because they are profits, not taking them puts them at risk. When Facebook went public its stock went down. When it got to about 1/2 its opening price I bought some. When the value of that holding doubled (100% return less taxes) I sold it. Had I kept it I would have more now, the profits from that sale helped fund a purchase of some Tesla, which I sold when it doubled in value. Which has helped in other purchases. Translating that back to your situation, if you're in real estate and you have some solid gains, consider selling, getting the gains and then re-investing in additional real estate to continue to ride the bubble. By taking out profits over time you may not make as much as you could but you also won't lose as much as you could.

maxerickson 9y ago
Translating that back to your situation, if you're in real estate and you have some solid gains, consider selling, getting the gains and then re-investing in additional real estate to continue to ride the bubble. By taking out profits over time you may not make as much as you could but you also won't lose as much as you could. There is always the possibility you will lose more by moving the funds. Like if Facebook had fizzled, that move would have lost you money.
- ChuckMcM 9y ago
  I think it is a bit more nuanced than that. You can always lose all the value in an uninsured investment. But you can't lose "more" than your initial investment if you take profits and move to another investment. The worst case is you lose the amount of your initial investment minus any profit you took out. You could have the situation you by 100 of A at $10, for $1,000. Then you sell it when it goes up to $15, and after paying fees/taxes keep $250, then invest the $1,000 in B at $10 each. And B craters and you lose all of the value in B. In that scenario you lost $750. ($1,000 lost in B, $250 gained in profits from A). Now its true that A could continue on its path to $20, and had you kept it you would have instead made a profit of say $750 after taxes and still have your $1,000. What I learned in 1999 was that that is not a good strategy. But it is the first strategy that everyone sticks with it seems (and certainly I was holding on to!), "Hey this has doubled in 5 years, in another five it will double again!". And part of my thinking was "Gee if I sell it I'll have to pay all these taxes, I'd much rather think of my self as having a net worth of $x rather than $0.66x." Lesson learned.

fictioncircle 9y ago

Most of which is not true for the average homeowner that isn't investing as they are immune to capital gains and income tax due to the homeowner exclusion. So they eat ~8% (tops). Landlords have to buy and hold because they eat the taxes. Redfin caters primarily to homeowners so you aren't really their target market.

anigbrowl 9y ago

Appreciation will presumably cover your transaction fees after a year or two in that particular market, and capital gains are levied against your profit. As others have pointed out, these things are predictable overhead in real estate investment. Being liable for a lot of tax is a good problem to have in this context.