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Real Estate and Taxes Question
Old 02-28-2017, 07:27 AM   #1
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Real Estate and Taxes Question

I recently retired and am currently in escrow to buy a new home in an area up the coast from where I currently live. Since I am buying the new place before I sell my current home, I figure I would use my taxable account to buy the new home and then put the money back when I sell my old home. I have no pension or other income, so I figured I would not qualify for a home loan. I modeled the tax implications in Turbotax and will have to deal with a huge tax bill. If I did not buy this new property, my 2017 taxes would be around $500, while the raising the cash for this new home will give me tax bill of over $50,000. Does anyone know of a better option to finance the home purchase? I am 56 years old with about half my portfolio in a taxable account and the other half in rollover IRA and Roth accounts. The new home is costing about the same what my current home is worth. Thanks for any suggestions.
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Old 02-28-2017, 07:34 AM   #2
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Some banks and credit unions will give you a mortgage even without regular income. I would investigate those options if I were you.
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Old 02-28-2017, 07:41 AM   #3
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I assume selling the current home and using the proceeds to buy the new home isn't an option? That would be the "easiest" way to avoid the tax bill imo. Barring that, I'd try to get a mortgage and then use the proceeds when you do sell to pay off the mortgage.
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Old 02-28-2017, 07:53 AM   #4
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I would find a way to finance the purchase or I would back out of the transaction. No way would I pay $50k in taxes to buy a new home. Does your tax calculation include California income taxes as well?

Your other problem because you are in Southern California might be the capital gains tax on the sale of the old home. A $250,000 exclusion for a single person does not go very far if you have owned your current home for a long time or you traded up under the old tax rules and deferred the gain. California taxes capital gains at ordinary income rates, so you could have a large income tax liability on the sale as well.
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Old 02-28-2017, 02:14 PM   #5
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How about a HELOC on your existing home to pay for most of your new home, then pay the HELOC off with proceeds from the sale of the existing home?
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Old 02-28-2017, 02:41 PM   #6
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How about a HELOC on your existing home to pay for most of your new home, then pay the HELOC off with proceeds from the sale of the existing home?
We did that. The key is to get the HELOC first. Our home couldn't be on the market and don't mention what you are planning to do. Actually I did say that to the loan gal, she filled me in, "your homes not for sale!".

Of course you still have to qualify, we couldn't get the maximum value based on our income. Some lenders may be more creative then BofA.
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Old 02-28-2017, 04:00 PM   #7
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Not sure what is in your taxable account, or how much, or where it is, but you might be able to get a margin loan. Rate won't be great on a small amount, but it is quick to arrange and doesn't require selling anything.
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Old 02-28-2017, 04:04 PM   #8
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I would definitely look at a heloc. I would also look to see, if you are changing counties, if your new country and old county have reciprocity for transferring your prop 13 tax rate. The only gotcha there is that the new home must be less than the old home in value.
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Old 02-28-2017, 04:32 PM   #9
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Mortgages for your situation are available, at least were a year ago when I got mine.

I went direct to one of the major banks where I had a decades long, but modest relationship.
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Old 02-28-2017, 05:27 PM   #10
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If you can find a bank to do a bridge loan that would be ideal. They expect that you will sell the property so you pay a bit more upfront but you avoid the early HELOC closing penalty fee.
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Old 02-28-2017, 10:27 PM   #11
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Thanks for replies. My realtor put me touch with a mortgage broker who found a loan for me. The terms are not great, but the cost will be much less than paying a huge tax bill. Wish I had arranged a HELOC while I was still working. Cannot qualify for one now since no income. The cost of the new place is slightly less than the value of the current home, so with the $250K exclusion there will be no capital gains taxes when I sell it. Also going from L.A. County to Ventura Co., so Prop 13 property tax stays the same.
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Old 03-01-2017, 05:49 AM   #12
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The difference in current market value is not the basis for the capital gains calculation. What you paid for the property you are selling, plus any capital improvements, is the basis. For example, if you paid $100k, have $50k in improvements, and sell for $700k net after selling costs, the capital gain is $550,000. $250,000 is excluded and you would pay tax on the $300,000. California taxes capital gains as ordinary income, plus you would owe the Obamacare surcharge on the federal side. It can be even more costly if you traded up under the old rules and moved a very low basis to your current home. In your shoes, if this scenario is at all like your situation, I would get an estimate of the tax you would owe before completing this transaction.

I can never sell my Bay Area home because the amount of tax I would pay is unacceptable. I traded up in 1989 under the old rules and the gross appreciation on this house is almost $1MM. I will borrow out the equity and rent out the property if I ever move. The heirs will receive the stepped up basis and Uncles Donny and Jerry will receive the fat middle finger.
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Old 03-19-2017, 07:05 AM   #13
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It turned out that I could not get the first loan the mortgage broker found for me, but he did find another loan for which I have received conditional approval. Unfortunately, escrow is suppose to close tomorrow and I would not get the loan money for at least another week. My offer was not contingent on getting a loan(see first post) and the sellers said they will not extend the escrow. My realtor told me that I have no hope of getting an extension for another week and that my only chance for getting an extension is ask for a three day extension and sell stock to raise the cash I need to pay the balance. If by chance the sellers agree to a three day extension and I sell the stock, is there any point in taking the loan money when it becomes available since I will have already incurred the capital gains tax liability from the stock sale? Not sure if it effects the answer to that question, but I figured to rent out the new place for a year to give me time to get my current place ready to sell.
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Old 03-19-2017, 07:50 AM   #14
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Quote:
Originally Posted by hiker88 View Post
I recently retired and am currently in escrow to buy a new home in an area up the coast from where I currently live. Since I am buying the new place before I sell my current home, I figure I would use my taxable account to buy the new home and then put the money back when I sell my old home. I have no pension or other income, so I figured I would not qualify for a home loan. I modeled the tax implications in Turbotax and will have to deal with a huge tax bill. If I did not buy this new property, my 2017 taxes would be around $500, while the raising the cash for this new home will give me tax bill of over $50,000. Does anyone know of a better option to finance the home purchase? I am 56 years old with about half my portfolio in a taxable account and the other half in rollover IRA and Roth accounts. The new home is costing about the same what my current home is worth. Thanks for any suggestions.
Does that 50k just come from cap gains of investments you have to liquidate or does it also include cap gain on the house itself? Not much you can do about the latter - to avoid the former, can you get a margin line of credit instead of selling?
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Old 03-19-2017, 07:57 AM   #15
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1. Talk to an attorney about the escrow extension and possible default. Will you lose your earnest money if you are still trying to close quickly in good faith? Ask the Atty. BTW, the sellers may change their mind about an extension if your attorney gets involved-or maybe not.
2. Talk to a CPA about the tax questions.
Your Realtor is most likely not an attorney, nor CPA.

This sounds like a very big deal, with extreme consequences for your finances. Get pro. advice.
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Old 03-19-2017, 08:20 AM   #16
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Can you take out the money from an IRA, use it and within 60 days put the whole sum back in? Use the loan to get the money back in. This might help your situation.
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Old 03-19-2017, 08:25 AM   #17
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More details can be found here: https://www.kitces.com/blog/understa...tee-transfers/
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Old 03-19-2017, 09:24 AM   #18
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Thank you for the ideas. I will call Vanguard first thing Monday morning.
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Old 03-19-2017, 11:49 AM   #19
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Can you do a margin loan on your taxable account securities, pay for the house and then take out the mortgage and use the mortgage proceeds to pay off the margin loan?

If so, it would avoid the tax issue since you would not be selling any securities, just using them as collateral.
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hmmm..maybe it's a good time to bail out!
Old 03-19-2017, 02:59 PM   #20
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hmmm..maybe it's a good time to bail out!

I wonder if all these roadblocks are telling you to BAIL OUT of the purchase. If I were you, I'd stop trying to buy this place and focus on selling the one you have. So many people have been screwed over by buying before unloading their current property and ending up in a very bad place. Peace of mind will be so much better! Risk will be greatly reduced. I've heard of prop 60 for the over 55 people who move from one property to another and get to retain their current taxes if they purchase a home within 5% of the sales price of their former home are in same county or in a reciprical county (I have not heard of prop 13 moving with you but I'm no expert). But, under any circumstance, Good Luck to you!
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