Buying a residence is a large decision. Deciding what house to buy predicated on the paint color is idiotic. A reader mentioned in response to my previous posting that I possibly could do a Starker-type deferred exchange on my condo and therefore defer taxes. This may be true, but I want to spend the amount of money at this point in my own life and get out of the Real Estate business for good. THEREFORE I shall need to pay capital gains fees. I wrote about Starker-type exchanges before and how they work. It is one particular “loopholes” you hear politicians railing about, but of course, no one wants to close it.
If you get an investment property in Chicago and then decide to move to New York, you might sell the Chicago property and buy a similar property in New York. Is this a “realization event” (see my posting on that) or merely transferring funds from point A to point B? Mr. Starker appeared to think not, and thanks to his court case, the law has been changed to permit such exchanges.
Your collateral in the initial property is used in the new one, tax-free. There are rules and limitations to the, of course – consult a taxes adviser for details. We do this back the 2000’s, offering a duplex and buying two condos in Florida. The duplex got doubled in value through the crazy times of the 2000’s and we bought the condominiums with the proceeds, transferring our basis in the property to those condominiums.
We then made a decision to sell one condominium, after it doubled in value from its purchase price. We’d to pay taxes on that. The other we made our primary residence for 3 years and then sold it, tax-free, as you do not pay taxes on the sale of your primary residence.
Neat trick when you can swing it. Well, not cheated per se as it is the law – just a law that favors real estate investors. Ah, the neat stuff you learn in law school – like how the rich get richer. But why is a personal residence not taxed? Again, we protected this before – you do not really generate income on the house you live in, it appreciates for a price equal to inflation generally. So when you element in how much you allocated to the house to keep it, well, it is a zero-sum game at best.
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You might get a big paycheck by the end, but it is equal to all the money you spent over the years on the house – in most cases. Again, see my publishing on that subject. So the legislation identifies this and doesn’t taxes personal residences. Nevertheless, you can convert accommodations property you own into your personal residence and then (if your home is there for 3 years roughly) not pay taxes on the sale.
Pretty odd legislation. Nonetheless it illustrates how laws – like Obamacare – can be oddly crafted to create unintended results. Three recent events in my own life happened which made me think about home buying. First was an article the Chicago Tribune (I think) saying that mini-mansions are hard to sell these days.
600,000 reduction onto it (which isn’t deductible!) to be able to market it. The styles of the 2000’s and colors are not as salable today and new home can be bought for less. The next thing was I found the first season of Glee! 1 and was viewing it. The part about “Sheets and Things” (where Mark proved helpful briefly) was spot-on, as was the scene where in fact the young few is looking to buy a residence – more concerned about features and performances than real value of the home.
The third thing was my Brother-in-Law telling me about showing houses to a millenial few. They rejected solid houses at good prices because they didn’t like the color of the inside color which of course is idiotic. It got me to considering though, that many of individuals make huge mistakes in home buying based on appearances and other superficial things and finish up broke because of this. Paint can be transformed. So can appliances and cabinets – once they degrade after 10-15 years. But many people choose a genuine home-based on the color of the walls, the sort of cabinets and flooring, and the appliances. It is stupid pretty.