4 ms·

Let's say the house didn't go up in value.. where would that leave you? Would you be any more capable to sell? (Serious question, not a rhetorical or sarcastic

Let's say the house didn't go up in value.. where would that leave you? Would you be any more capable to sell? (Serious question, not a rhetorical or sarcastic one.. just seems to me you'd still be in a hole, just a different hole)

jblow 9y ago
The hole would be smaller, thus more likely to be affordable with wages / savings / etc.
bzbarsky 9y ago
> Would you be any more capable to sell? Quite possibly, yes. Let's plug in some plausible numbers. Say someone buys a 3-bedroom house for $300k (they have kids). At the same time, 1-bedroom houses sell for $200k. Time passes, the kids grow up and move out. Say house prices didn't change at all. You sell for $300k, buy for $200k, pay some agent fees, have $85k or so left over. Now say prices went up and the 3-bedroom house is $1,500,000. You sell, have a $1.2e6 capital gain. $500k is deductible, you pay taxes on the remaining $700k. That's taxed at 20% federal plus the ACA 3.8% investment income tax (because your income is way over that boundary) plus state capital gains taxes. In California, capital gains are taxed the same as other income, at first glance; let's be charitable and assume you avoid the higher tax brackets (12.3%) and get taxed at an effective 10% here. That's 33.8% tax. So your after-tax sale proceeds are $500k + 0.662*$700k = $963k. Note that your house went up in price by 5x. If the smaller one did too, it costs $1 million and you can't pay for it anymore. If it went up by more than that (e.g. if the primary inflation was in land prices, which it often is) you might be even more in the hole. Things are even worse if you're trying to sell and buy something equivalent instead of downsizing.
- rapala 9y ago
  You'r missing 300k from your after tax sale proceeds. You could still afford the smaller house with 263k left over. You would make a 37k loss yes, but you could buy the new house. An important distinction in my opinion.
  - bzbarsky 9y ago
    Yes, you're absolutely right, good catch! Of course all that assumes that you're not leveraged at all (paid-off morgage). If you're leveraged, price increases are generally a win even in the face of capital gains taxes on the increase.
- simonbarker87 9y ago
  I’m amazed that the US charge capital gains on primary residence sales - in the UK we have Private Residence Relief which means you pay no capital gains from the sale of your primary residence, so long as you meet some requirements that are very easy to meet and I would say 99% of owner occupiers meet.
  - mercutio2 9y ago
    99% of American home owners also qualify for full capital gains relief. Gains greater than 500k are extremely rare outside of certain overly restrictively zoned areas.
    - simonbarker87 9y ago
      Ah, ok

jblow 9y ago

The hole would be smaller, thus more likely to be affordable with wages / savings / etc.

bzbarsky 9y ago

> Would you be any more capable to sell? Quite possibly, yes. Let's plug in some plausible numbers. Say someone buys a 3-bedroom house for $300k (they have kids). At the same time, 1-bedroom houses sell for $200k. Time passes, the kids grow up and move out. Say house prices didn't change at all. You sell for $300k, buy for $200k, pay some agent fees, have $85k or so left over. Now say prices went up and the 3-bedroom house is $1,500,000. You sell, have a $1.2e6 capital gain. $500k is deductible, you pay taxes on the remaining $700k. That's taxed at 20% federal plus the ACA 3.8% investment income tax (because your income is way over that boundary) plus state capital gains taxes. In California, capital gains are taxed the same as other income, at first glance; let's be charitable and assume you avoid the higher tax brackets (12.3%) and get taxed at an effective 10% here. That's 33.8% tax. So your after-tax sale proceeds are $500k + 0.662*$700k = $963k. Note that your house went up in price by 5x. If the smaller one did too, it costs $1 million and you can't pay for it anymore. If it went up by more than that (e.g. if the primary inflation was in land prices, which it often is) you might be even more in the hole. Things are even worse if you're trying to sell and buy something equivalent instead of downsizing.

rapala 9y ago
You'r missing 300k from your after tax sale proceeds. You could still afford the smaller house with 263k left over. You would make a 37k loss yes, but you could buy the new house. An important distinction in my opinion.
- bzbarsky 9y ago
  Yes, you're absolutely right, good catch! Of course all that assumes that you're not leveraged at all (paid-off morgage). If you're leveraged, price increases are generally a win even in the face of capital gains taxes on the increase.
simonbarker87 9y ago
I’m amazed that the US charge capital gains on primary residence sales - in the UK we have Private Residence Relief which means you pay no capital gains from the sale of your primary residence, so long as you meet some requirements that are very easy to meet and I would say 99% of owner occupiers meet.
- mercutio2 9y ago
  99% of American home owners also qualify for full capital gains relief. Gains greater than 500k are extremely rare outside of certain overly restrictively zoned areas.
  - simonbarker87 9y ago
    Ah, ok