What to do with a $1 million house?

30 Replies

My grandparents are retired and own their home outright here in Hawaii. It's probably worth a little over $1.2 million , and they're considering selling it and moving to Las Vegas.

Their plan is to buy two SFHs in Vegas with cash from the proceeds of the Hawaii sale, live in one and rent out the other. When they pass, one of the homes would go to my mom and the other to my uncle.

A little more context:

  • They would prefer not to re-leverage the Hawaii house (or use leverage on the Vegas homes), though they haven't ruled it out.
  • House hacking (either with roommates or in a MFR) isn't an option for them.
  • They chose Vegas because it's the 9th Hawaiian island and they visit 2-3 times per year.

I'm wondering if there are any other creative strategies for us to consider. Don't know that there is, but I figured I'd put it out to BP nation.

Sounds like a perfect plan given their age and their goals. I agree leveraging the Hawaii or Vegas house makes zero sense.  You want zero risks at this point of their lives.  Maybe buy 2 nice medium price homes cash sit on them. Put the rest away and enjoy the buffet at the Wynn.  

Hey Travis.  One thing to consider when they sell is the tax liability.  Take $1.2M and subtract the associated costs of the home (i.e. purchase price, closing costs (purchase and sale), and remodel costs).  If I had to guess, I'd estimate the total associated costs at about $250k-$300k.  Let's assume it's $300k.  This would leave them with a $900k gain.  I assume they've lived in the home for 2 of the last 5 years, so that's another $500k reduction bringing them to a $400k gain, which will be subject to tax.  How much tax depends on a lot of personal/unique factors.

If we assumed a 15% tax rate, that'd be $60k in taxes.

If they aren't planning on moving for a year or more, they could do a HELOC or cash out refi for $400k or more, and use the money to buy their first Vegas property for cash. This will allow them to sell their Hawaii property tax free, or close to it, because the $400k loan will reduce their gain when they sell.

You'll want to consult a mortgage expert and tax professional, since I am neither.  :)  They can help provide concrete numbers to this option.

Hey Travis - where in hawaii? i own a few properties in Vegas and have been thinking about selling one or two and buy something in hawaii instead for a while haha - i actually just decided to not renew the lease on one and list it for sale at the end of the month, and consider selling another one - its a shot faaaar into the blue, but maybe we could structure a deal.......? That way both parties could eliminate some tax liability, and a good chunk of realtor fees... would obviously need some talking tho to work something out! 

Send me a PM if that is something thats generally of interest to you guys! 🤯🤔

@Travis Henry @Isi Nau

NOT TRUE NOT TRUE NOT TRUE. 

A heloc will not reduce the capital gain or the taxes due one penny. 

Pay the $60k in taxes if you have a $900k gain, 7% tax is almost zero. You’re new residence will be an income tax free state and you’ll start saving towards the $60k. 


@Frank Wong Thanks for the insight, Frank. This seems to be the way they're leaning...especially the buffet!

@Isi Nau  @Bill Brandt  Appreciate you running me through the scenario. I'll definitely connect with a mortgage expert and discuss with a CPA to be sure we understand what the numbers would look like on the back end.

@Stephan Kraus Hawaii Kai on Oahu. They're still in the very early stages of planning a move, so it'll be a little while before they execute. Good luck with the sale of your property!

Might be a good idea to think through asset protection, especially if they plan to go into rental.  There are also great estate planning strategies that complement asset protection that will lower overall risk and protect investment partners and aide in generational exchange of assets.

With two houses, one live in and one rental, they may want to hold the rental in an LLC or trust and planning this at the start makes property transfer easier. Check out https://www.biggerpockets.com/blog/estate-planning-overview-real-estate-attorney for some tools that can help in this planning.

@Bill Brandt

THANK YOU THANK YOU THANK YOU for the enthusiastic response.

I hope to be at a point one day when I can say $60,000 in taxes is next to zero.   ;)

@Travis Henry Considering the stage in their lives and wanting to pass the houses over to their children, I think this is a fairly decent plan plus they get to spend their time in Las Vegas. 

Buying the two houses in Vegas without leverage is ideal as they would still have the equity sitting in both houses. 

Without the options for them to buy MFRs, then they are ready to enjoy Viva Las Vegas! 

@Travis Henry I agree completely with there strategy. In my opinion you want to limit risk as you are getting older so you can live comfortably and without worrying about loans being passed to your children or other complications with leverage.

Originally posted by @Isi Nau :

Hey Travis.  One thing to consider when they sell is the tax liability.  Take $1.2M and subtract the associated costs of the home (i.e. purchase price, closing costs (purchase and sale), and remodel costs).  If I had to guess, I'd estimate the total associated costs at about $250k-$300k.  Let's assume it's $300k.  This would leave them with a $900k gain.  I assume they've lived in the home for 2 of the last 5 years, so that's another $500k reduction bringing them to a $400k gain, which will be subject to tax.  How much tax depends on a lot of personal/unique factors.

If we assumed a 15% tax rate, that'd be $60k in taxes.

If they aren't planning on moving for a year or more, they could do a HELOC or cash out refi for $400k or more, and use the money to buy their first Vegas property for cash. This will allow them to sell their Hawaii property tax free, or close to it, because the $400k loan will reduce their gain when they sell.

You'll want to consult a mortgage expert and tax professional, since I am neither.  :)  They can help provide concrete numbers to this option.

Not sure about that  borrowing against a home does not change the basis for which gains are computed..  and if they only owe 60k in tax's my vote would be to just pay them.. and smile at your good fortune..  I agree about Hawaii being the 9th state Hawaiian airlines really has a monopoly on that route price is double any other route.. so when I go in December I have to fly to PDX first then go over.. still far cheaper. LOL even though I would love to have the lie flat seats Hawaiin offers on the 350.. 

 

Originally posted by @Bill Brandt :

@Travis Henry @Isi Nau

NOT TRUE NOT TRUE NOT TRUE. 

A heloc will not reduce the capital gain or the taxes due one penny. 

Pay the $60k in taxes if you have a $900k gain, 7% tax is almost zero. You’re new residence will be an income tax free state and you’ll start saving towards the $60k. 

Bill shoot I did not read your response and I responded with the same thing  debt does not increase basis and my vote in these situations is to pay the tax.. sometimes we let the tax tail wag the dog.. 

 

Originally posted by @Enrique Mejia :

@Travis Henry 1031 exchange to protect the capital gains?

don't think you can 1031 your personal resi.. that's why we have the 500k exclusion which for us west coast homeowners who have enjoyed massive appreciation its the best tax treatment in the USA in my mind bar none..  and or other areas of the country that have seen 250k homes to one million or more.. 

 

Originally posted by @Enrique Mejia :

@Jay Hinrichs you can if you make it a rental property first. 

well of course .. that goes without saying.

 

@Enrique Mejia , That would be a great option for @Travis Henry depending on other factors - Move to Vegas and buy something with a mortgage for a bit or just rent for a bit.  Convert the house to a rental and when they sell a year later they would still get the full primary residence exemption which they'd use to pay off their first Vegas property  and 1031 the remainder into a new rental in Vegas.  

But... along the way there's all kinds of other factors and variables that would have to be considered like cost of carrying risk of market turn, cost of renting or a mortgage in Vegas,  etc.

Grandma and Grandpa are already retired and don't need need complications in their life.  And I'm guessing that some tax isn't going to break their bank.  I'm with @Jay Hinrichs on this.  Keep it simple.  Sell pay whatever tax on what isn't tax free above the $500K primary exemption.  And go have fun in the 9th Island (never heard that before but I can see it!!!)


@Enrique Mejia , Love them as much as root canal without anesthesia!!  I love your scenario.  All it takes is a highly appreciated primary residence and a little patience.  We do several a year of these.  Good thought!

@Scott Smith Thanks Scott! I'll pass along your blog post!

@Ola Dantis @Noah Mccurley Amen!

@Enrique Mejia We briefly discussed a 1031 with a scenario similar to what @Dave Foster mentioned in his post. Dave was also spot on about their intention to keep things as simple as possible. In this case, it seems like buying two Vegas homes with the proceeds from the Hawaii sale is the most optimal option.

@Jay Hinrichs I think they travel with Vacations Hawaii - Omni Airlines. Definitely not a Hawaiian Airlines, but to them, the convenience of the Vacations Hawaii package can't be beat!

@Travis Henry   I think they are smart to sell the one in Hawaii and buy two houses-one for themselves and another as a rental.  The only thing they might want to think about is rather than leaving one house to your mom and one to your uncle, is to split both 50:50.  If one house is worth more at the time of their death, it could cause problems.  By all means your mom and uncle could buy out one person's share in the house; but I'd avoid any potential problems.  That also means they can buy the house they want to live in rather than worrying about getting two similar homes.

@Travis Henry

Hi Travis,

There are some great responses before me.Considering your parents occupied the house for last 5 yrs. My 2 cents would be, pull out heloc to purchse a house in Vegas. Rent current Hawaii Kai house for sometime and before 2 yrs out of 5 is over sell it to do a 1031 exchange. This should get them $500K tax exemption and they can 1031 the remaining balance into some investment properties.

Again, I am not a CPA or tax attorney and each case is different so consult your CPA.

@Theresa Harris That’s a great point. I’m not sure if they’ve considered doing that, but I think in their minds, the simple solution was to have two houses - one for each child.

I guess another option, similar to what you’re suggesting, would be for them to just buy a single home in Vegas to be split 50/50 between the kids, and put away the rest of the cash. I don’t get the feeling that they’re NEEDING the cash flow from a rental home in Vegas, nor that they’d want to have to deal with a PM. Definitely not trying to self manage a rental in retirement!

Originally posted by @Bill Brandt :

@Jay Hinrichs

Hey jay,

If you can come back here to coach status, you can now fly Vegas to Hawaii pretty cheaply on allegiant. 25-50% cheaper at least. 

sorry cant get me on Allegiant.. I will stick to Alaska air.. little cheaper  but I know what to expect..  I think Southwest is or was going to fly to the islands with the new 737 Max  but seeing as how they are grounded maybe they are not doing that yet.. 

I just shop and shop and when a first class ticket comes up that I can use my status for free upgrade I grab it.. :)