Get out of house without too much taxation?

[pb4uski]

Since you mention the rental ... have you been reporting that income on your taxes and taking depreciation on that portion of the property? That makes your taxes on the sale a bit more complicated.

I agree that you should sell. The tax hit is still going to be less than your the savings on expenses, but it's not quite as straightforward as pb4uski's estimate when you factor in that rental usage. If you're not comfortable with the section of IRS pub 523 that talks about gain/loss calcs when having a separate rental unit on the property, then you should plan to have a pro do your taxes for the year that you sell.

Fair point... I guess I read past the rental in the walk-out basement. Of course it depends on whether the OP has been using Schedule E or just his pocket.

 

[foxcreek9]

Ya it's just about 4x'd in 33 years, with the extra $100k I put into it and other improvements that DW & I did. Maybe up 3x or so if you factor those in.
Northern CO has been a good place to own real estate -- my rental has gone up about 8%/yr.

I'm a fellow Iowa Stater BTW, EE/CprE '79.

Were fellow staters, except mine is Illinois, BS Accounting '82

 

[foxcreek9]

Ha, we must be neighbors. I think ours went up about 25% in 20 years

yep, couple hours southwest

 

[GaryInCO]

Were fellow staters, except mine is Illinois, BS Accounting '82

Huh!! Didn't realize there was another ISU with a Cardinal (or at least Redbird that looks like a cardinal) mascot!

 

[cathy63]

Oooh, good point. I don't think @ncbill's point about DW/my improvements is an issue, since my basis reset when I bought out her half. That's how my CPA showed it anyway. (I hope so! My records from 20-30 years ago are, ahh, spotty...)

But the depreciation for the rental, and for my home office (I've been self-employed and worked from home since 1991), will definitely have an impact. That'll increase the cap gains, about $30k or so I think, but it won't really change the decision.

I'm not exactly sure how this works in a non-community property state like Colorado, but if you bought your ex's half of the property, wouldn't that only reset the basis on half of the house? I think your basis would be half the original cost plus whatever you paid your ex, plus half the improvement costs from the original purchase date, plus all the improvement costs since the date you bought out your ex. It's probably a good idea to have the same CPA do your taxes on the final sale if possible.

The depreciation recapture increases your ordinary income in the year of sale and decreases your cap gains. Basically the taxable profit is divided between depreciation recapture, which is taxed at your ordinary rate, but capped at 25%; and long term capital gains, which are taxed at LTCG rates.

 

[Rustic23]

Would it work to lease the house, live where you want and they get the house when you die?

 

[audreyh1]

I've only just started to look around, but the places I've seen are all rent-based.

Tons of 55+ places you buy your home. We’re in one now. This is not a CCRC or assisted living type place, just a 55+ development. HOA takes care of yard maintenance for you, and there are shared facilities (clubhouse, pool, gym etc.) and an active social calendar if you’re into that kind of thing. But no healthcare related services.

 

[pb4uski]

Would it work to lease the house, live where you want and they get the house when you die?

Seems to me that would work but would introduce a lot of risk and hassle to avoid what is not much tax in the whole scheme of things.

Besides, would the kids prefer to inherit a house with a stepped up basis that they they have to either manage as a rental or sell or simple coin of the realm.

KISS... and just sell the house, pay the tax and move on.

 

[MarieIG]

Hmmmm. I'm wondering about the rental aspect - not so much for the tax issue, but that it gives Gary the opportunity to rent a small place in a community for a year or so, and see how he likes it.

 

[Koolau]

I have heard (here and elsewhere) that it is rarely a good idea to base a financial move solely on tax avoidance. YMMV

 

[GaryInCO]

Valid point, @Koolau. I'm still considering options.

My CPA said the basis reset when I bought out ex-DW. Unfortunately I can't confirm that with him, since he went and died last year ... I'll have to check with the woman who took over his practice & client list.

 

[frayne]

You're 66. Does it make any sense to carry this big house that you don't really want or need for another 15-25 years or more so they can get $38k more?

Sell it, pay the tax on the taxable gain and go on to enjoy the rest of your life.

[emoji23]

Exactly and the key number here is 66.

 

[yclipse]

Two points I always make to my clients:
1. Your first obligation is to YOU. The interests of those who may inherit are much less important.
2. Don't be afraid of capital gains taxes. They are payable only if you have capital gains. You get to keep 80-85% of them.

 

[Out of Steam]

File this under, "I wish I had your problem". Lived in our current house for 20 years, it has appreciated 37% over what we paid for it and 23% more than what the original owners paid for it in 1998.

My wife and I also sold a house without a lot of profit to show for 18 years of ownership.

The subtitle next to my name on another online forum is "Real Estate Skeptic".

 

[HI Bill]

The subtitle next to my name on another online forum is "Real Estate Skeptic".

If you're in the right area, and have some semi-decent market timing luck, real estate appreciation can be super fast. I made $100K on a $90K condo in less than 5 years, made $20K on a $350K condo in one year, 'broke even' on two ~$300K condos held for 5 and 8 years, and my current property went up ~50% from $1M to $1.5 in just two years. Of course, the flip side is that real estate tends to go in cycles, regionally. Waiting for the interest rate hikes shoe to truly drop.

 

[trumpeting_angel]

I believe the loneliness issue is much more important than the tax issue. Loneliness shortens your lifespan in addition to making the time you have less pleasant.

What have we worked and saved for if not to enjoy these years? Spend some time really shopping around in those over-55 communities. Not the real estate, but the people and the activities. Meet your needs first, and be a happier dad/granddad for your family.

 

[imnontrad]

Yes, you would pay cap gains. But the amount you would possibly save in property taxes, insurance, utilities, etc. in later years may make up for this.
But if over 63, be prepared that this will also affect your medicare premiums / years later (IRMAA).

 

[pb4uski]

If you're in the right area, and have some semi-decent market timing luck, real estate appreciation can be super fast. I made $100K on a $90K condo in less than 5 years, made $20K on a $350K condo in one year, 'broke even' on two ~$300K condos held for 5 and 8 years, and my current property went up ~50% from $1M to $1.5 in just two years. Of course, the flip side is that real estate tends to go in cycles, regionally. Waiting for the interest rate hikes shoe to truly drop.

+1 Our first house in 1984 was right place/right time thing and almost doubled in 2 years. We had a piece of lakefront property (land only) with a 44% gain in two years. Out Florida condo has increased 71% over 7 years, so not bad.

OTOH, our longtime main home we sold at a 27% gain and we had lived there 25 years and our current lakefront home is probably not a huge gain either.

 

[Out of Steam]

If you're in the right area, and have some semi-decent market timing luck, real estate appreciation can be super fast.

Our picks and market timing have been as poor as yours have been good. I've owned a house for all but one year since 1987 and have less than $200K in equity.

While I've enjoyed living in the houses, we would probably have been financially better off as lifelong renters. All I can say is that I'm glad our retirement accounts have done much better than that.

 

[Koolau]

Supposedly, the watch word(s) for real estate are "location, location, location." But I add the 4th word "timing." When the kids outgrew their parochial school (8th grade) we bought a house in another location so that they would be in the school district that was in the State's top tier of schools. We pretty much paid top dollar for the house. We had to remodel it to make it w*rk for us. There was a fair amount of plumbing, electrical and HVac that needed to be done. We added new windows as the old ones were more like sieves than windows. We eventually replaced the roof and painted the place twice.

The kids all went off to university or c@reers, so we moved to Paradise (per our plan.) Heh, heh, we ended up selling at the same price we paid even though we'd put quite a bit into the place and natural inflation would have suggested at least some price growth. SO, FF to 6 years later and the price for the house had doubled. Currently, it's almost 3X. No way we would have hung onto it and rented it out. It's just the luck of the draw. No regrets, but RE is fickle and dependent on many factors - luck (or timing, whichever you prefer) being a big one. YMMV

 

[FLJim]

I'm 66. I have two sons that I want to leave as much as possible. (Hopefully not soon, but eventually.)

I have a too-large house. It's a beautiful place, on a lake, and it's been wonderful to live here for the last 33 years. (It was nicer before ex-DW decided to take a hike, but ohwell.) But it's stupidly large for one person, over 4000', expensive to keep up, and *lonely*. I built a separate apartment in the walk-out basement which helps the cashflow and reduces the loneliness, but ... Lately I've been thinking of down-sizing. Maybe move into one of those over-55 communities so I have more social interaction opportunities.

But I have over $500k equity/gains in the house, and I would rather that money goes to my boys instead of my Uncle. If I kept it until I died, the basis would reset and my sons wouldn't owe any tax on it. But if I downsize, I would get a $250k exemption and then taxes on $250k or so would go to Uncle.

What's the smart way to keep the $$ for my boys?

Do you want to leave "as much money as possible" to your sons because they need it, or some other reason? If they love you as much as you apparently love them, they would want you to address your loneliness more than your tax problems. Work hard to find an over-55 community as your top priority. Being lonely for the last 25 years of your life is a sentence. JMHO.

 

[shafer9]

Big house by the lake doesn’t mean a thing.

 

[pb4uski]

Big house by the lake doesn’t mean a thing.

I'm guessing, says the person who doesn't have a big house by the lake.

 

[shafer9]

You misunderstand. Actually, I had a big enough house on Long Island sound for years. Decided it was too much effort trying to impress other folks who really didn’t care anyway. Simpler, for me, has been better.

 

[pb4uski]

Got it. From what you wrote it sounded like envy.

I wasn't sure if perhaps you meant that the big house on the lake wouldn't mean a thing to his kids compared to their father's happiness and good mental health but just truncated it a bit too much.

I agree that simper is better. That's why I have a small house on the lake.