Equity Rich - Need Advice
Long Beach, CA · Member since 2016 · 22 posts · 4 votes
Equity Rich - Need Advice
Most Popular Reply
Quote from @Ronin Crimmons:
@Ronin Crimmons your welcome.
I'll take a minute to point out my pet peeve, i guess.. If you wanted to rent it out with a cashout refi...75% of 2.3.mil is 1.725mil. For the sake of argument, lets say you get a loan at 6%, the same as the effective one time federal tax rate. That's ~$103.5k in interest the first year. The subsequent years will be similar... (yeah, I'm assuming yourproperty is free and clear)
So, your opt1, you'd rather pay a lender $~100k per year, at least for the first several years, instead of paying the gov't $137k? It might be $200k if you inlcude CA taxes (ihave no idea). These sales pitches are really spiteful about paying taxes.
"They'll say that you get rent." "flip it around:" you sell and pay the say $200k, whatever. Now you have 2.1mil in cash. Sitting in a money market fund thats 5%+ annually --- $105k. Oh, rates won't stay this high forever.. You have those dividend aristocrats doing near or at 5% dividends.. You have various income oriented funds and securities doing not 10% and even 12%+.. Oh, you hate the stock market --- how about private lending (in real estate) doing ~12%? Holding debt is really the way to go.
Oh, you really want to be a landlord, sell and take some of that capital to buy a rental property. You are borrowing "more" money, not your own from your own property. One should look at / educate about overall investing, not even just one niche of real estate investing.
Anyway, happy to chat about this if you like. Hope this helps.
26 Replies
- Member since 2024 · 4 posts · 0 votes2y
I took all my value and bought a larger home with an apartment or airbnb or some other business venture in the same address so did the personal residence exchenges only into the home I lived in and did a rental for the rest of the house. worked great. I know people that bought 4 homes next to each other for the 2.3M and moved from one to the next every two years. I think it's harder to do that now, some law changes so maybe others here can correct me.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Ronin Crimmons:
First, thank you for any advice or recommendations. We would like to buy a bigger house and move up.
I am equity rich on my primary residence. Own free and clear with value estimate of 2.3 mil. My cost basis is 1.1 mil. If I sell, after realtor's fees and homeowner's exemption (500K), I would owe tax on 685K or almost 200k. The thought of giving 200k to the government makes me sick.
Any recommendations to avoid this? It appears my options are:
1. Keep and rent out, use new rent to help pay newer larger mortgage - thus expanding my real estate portfolio and then 1031 after a couple years.
2. Sell and just pay the tax and consider myself fortunate to be in this situation.
Anything else I am missing? Thank you in advance
Deferred Sales Trust.
7e investments53 Reviews - Member since 2024 · 4 posts · 0 votes2y
you can do a deferred sales trust on a primary residence?
- Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes2y
Run the math not a BOE but an actual calculation to determine your tax so you can actually make an informed decision. After that, tell us what your tax rate is on your 1MM plus gain?
Read Publication 523 and let us know what you figure out for a conversation starter.
Jonathan Bock, CPA
- Long Beach, CA · Member since 2016 · 22 posts · 4 votes2y
Quote from @Jonathan Bock:
Run the math not a BOE but an actual calculation to determine your tax so you can actually make an informed decision. After that, tell us what your tax rate is on your 1MM plus gain?
Read Publication 523 and let us know what you figure out for a conversation starter.
Jonathan Bock, CPA
Ran the actual numbers for CA taxes and Fed Cap Gains. Actual number is $138,604. Not the 200k using BOE calculations.
20% of 685k is $137k would be your federal tax liability that i see...
If you have any other capital losses, you could tax harvest to offset that gain/liability.
Are you already an investor? I wouldn't start for the sake of 6% of your home value (137k/2.3mil).
Just to balance off, you are still getting ~2.1mil from 1.1mil --- that's double your money after whatever number of years. Don't dig yourself into another "situation" just because you are spiteful about paying taxes. While I am guessing you will be taking some or all of this equity to your next home, if you try to leave it deferred via renting then1031, then the capital will never really be available to you unless you pay some tax.
The sec121 exclusion of 500k is considered the best tax break. If you don't use it now, you lose it and basically just make your situation worse.
Don't forget that if you start renting, you'll have to take depreciation. At your home value, that's a lot of tax liability being built up per year that you will have to pay back if you sell. So, thats a fair amount of equity that you are pricing yourself out of due to not wanting to pay ~6% of your gain (federally anyway).
Probably not as sophisticated as the Deferred Sales Trust, but an installment sale would spreadout the liabiilyt and maybe you could be federally taxed at 15% instead of 20%, thus saving 5%. You'd also save on NIIT which I think applies which is 3.8% on i THINK over $400k (I don't remember the exact number anymore).
Good luck.
- 2yKo KashiwagiPro MemberLender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
Hi Ronin,
There are a couple alternative options you have. For example, you could cash-out refinance the property to and use the cash downpayment to fund your next property.
You can also move out of the primary resident, rent it out (for 2+ years) and do a 1031 exchange, which would defer the taxes.
A Deferred Sale Trust is another strategy, where you can sell the property to a trust in exchange for a promissory note. By paying taxes on the income you receive from the trust, you can potentially spread the tax burden over many years.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Ronin Crimmons:
First, thank you for any advice or recommendations. We would like to buy a bigger house and move up.
I am equity rich on my primary residence. Own free and clear with value estimate of 2.3 mil. My cost basis is 1.1 mil. If I sell, after realtor's fees and homeowner's exemption (500K), I would owe tax on 685K or almost 200k. The thought of giving 200k to the government makes me sick.
Any recommendations to avoid this? It appears my options are:
1. Keep and rent out, use new rent to help pay newer larger mortgage - thus expanding my real estate portfolio and then 1031 after a couple years.
2. Sell and just pay the tax and consider myself fortunate to be in this situation.
Anything else I am missing? Thank you in advance
Sell and pay tax , the gov and market gives you free money without doing anything
- Long Beach, CA · Member since 2016 · 22 posts · 4 votes2y
Quote from @David M.:
20% of 685k is $137k would be your federal tax liability that i see...
If you have any other capital losses, you could tax harvest to offset that gain/liability.
Are you already an investor? I wouldn't start for the sake of 6% of your home value (137k/2.3mil).
Just to balance off, you are still getting ~2.1mil from 1.1mil --- that's double your money after whatever number of years. Don't dig yourself into another "situation" just because you are spiteful about paying taxes. While I am guessing you will be taking some or all of this equity to your next home, if you try to leave it deferred via renting then1031, then the capital will never really be available to you unless you pay some tax.
The sec121 exclusion of 500k is considered the best tax break. If you don't use it now, you lose it and basically just make your situation worse.
Don't forget that if you start renting, you'll have to take depreciation. At your home value, that's a lot of tax liability being built up per year that you will have to pay back if you sell. So, thats a fair amount of equity that you are pricing yourself out of due to not wanting to pay ~6% of your gain (federally anyway).
Probably not as sophisticated as the Deferred Sales Trust, but an installment sale would spreadout the liabiilyt and maybe you could be federally taxed at 15% instead of 20%, thus saving 5%. You'd also save on NIIT which I think applies which is 3.8% on i THINK over $400k (I don't remember the exact number anymore).
Good luck.
Good insight, thank you.
- Long Beach, CA · Member since 2016 · 22 posts · 4 votes2y
Quote from @Carlos Ptriawan:
Quote from @Ronin Crimmons:
First, thank you for any advice or recommendations. We would like to buy a bigger house and move up.
I am equity rich on my primary residence. Own free and clear with value estimate of 2.3 mil. My cost basis is 1.1 mil. If I sell, after realtor's fees and homeowner's exemption (500K), I would owe tax on 685K or almost 200k. The thought of giving 200k to the government makes me sick.
Any recommendations to avoid this? It appears my options are:
1. Keep and rent out, use new rent to help pay newer larger mortgage - thus expanding my real estate portfolio and then 1031 after a couple years.
2. Sell and just pay the tax and consider myself fortunate to be in this situation.
Anything else I am missing? Thank you in advance
Sell and pay tax , the gov and market gives you free money without doing anything
Agreed
Quote from @Ronin Crimmons:
@Ronin Crimmons your welcome.
I'll take a minute to point out my pet peeve, i guess.. If you wanted to rent it out with a cashout refi...75% of 2.3.mil is 1.725mil. For the sake of argument, lets say you get a loan at 6%, the same as the effective one time federal tax rate. That's ~$103.5k in interest the first year. The subsequent years will be similar... (yeah, I'm assuming yourproperty is free and clear)
So, your opt1, you'd rather pay a lender $~100k per year, at least for the first several years, instead of paying the gov't $137k? It might be $200k if you inlcude CA taxes (ihave no idea). These sales pitches are really spiteful about paying taxes.
"They'll say that you get rent." "flip it around:" you sell and pay the say $200k, whatever. Now you have 2.1mil in cash. Sitting in a money market fund thats 5%+ annually --- $105k. Oh, rates won't stay this high forever.. You have those dividend aristocrats doing near or at 5% dividends.. You have various income oriented funds and securities doing not 10% and even 12%+.. Oh, you hate the stock market --- how about private lending (in real estate) doing ~12%? Holding debt is really the way to go.
Oh, you really want to be a landlord, sell and take some of that capital to buy a rental property. You are borrowing "more" money, not your own from your own property. One should look at / educate about overall investing, not even just one niche of real estate investing.
Anyway, happy to chat about this if you like. Hope this helps.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @David M.:
Quote from @Ronin Crimmons:
@Ronin Crimmons your welcome.
I'll take a minute to point out my pet peeve, i guess.. If you wanted to rent it out with a cashout refi...75% of 2.3.mil is 1.725mil. For the sake of argument, lets say you get a loan at 6%, the same as the effective one time federal tax rate. That's ~$103.5k in interest the first year. The subsequent years will be similar... (yeah, I'm assuming yourproperty is free and clear)
So, your opt1, you'd rather pay a lender $~100k per year, at least for the first several years, instead of paying the gov't $137k? It might be $200k if you inlcude CA taxes (ihave no idea). These sales pitches are really spiteful about paying taxes.
"They'll say that you get rent." "flip it around:" you sell and pay the say $200k, whatever. Now you have 2.1mil in cash. Sitting in a money market fund thats 5%+ annually --- $105k. Oh, rates won't stay this high forever.. You have those dividend aristocrats doing near or at 5% dividends.. You have various income oriented funds and securities doing not 10% and even 12%+.. Oh, you hate the stock market --- how about private lending (in real estate) doing ~12%? Holding debt is really the way to go.
Oh, you really want to be a landlord, sell and take some of that capital to buy a rental property. You are borrowing "more" money, not your own from your own property. One should look at / educate about overall investing, not even just one niche of real estate investing.
Anyway, happy to chat about this if you like. Hope this helps.
Correct , switch from equity to debt is may better when money is expensive.
So sell and pay tax lol
- Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes2y
Best option for cash flow is to 1031 exchange into an amazing cash flow market. People are looking at markets like the Midwest and KC.
- Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes2y
Forgot to mention I can show you some examples of this.
- Lender · Nationwide · Member since 2018 · 571 posts · 310 votes2y
With the standard disclaimers about tax advice and how everything depends on your goals: If you have a high income, when you cashout refi you may also able to take the interest payments as a write off, which may make your effective interest rate lower than it would seem.
Investing in a qualified opportunity fund is also a way to favorably deal with current capital gains tax, and avoid getting more in the future. But you will need to make sure the investment is eligible.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes2y
Quote from @Ko Kashiwagi:
Hi Ronin,
There are a couple alternative options you have. For example, you could cash-out refinance the property to and use the cash downpayment to fund your next property.
You can also move out of the primary resident, rent it out (for 2+ years) and do a 1031 exchange, which would defer the taxes.
A Deferred Sale Trust is another strategy, where you can sell the property to a trust in exchange for a promissory note. By paying taxes on the income you receive from the trust, you can potentially spread the tax burden over many years.
The 1031 and rent it out was exactly what I was going to suggest. The only issue is that you will have to turn it into a rental/investment property before you can turn it back into your residence. Not sure if you have wife/kids and how this wouid sit with them but it's an option.
Skyline Properties - Member since 2019 · 144 posts · 93 votes2y
Quote from @Ronin Crimmons:
First, thank you for any advice or recommendations. We would like to buy a bigger house and move up.
I am equity rich on my primary residence. Own free and clear with value estimate of 2.3 mil. My cost basis is 1.1 mil. If I sell, after realtor's fees and homeowner's exemption (500K), I would owe tax on 685K or almost 200k. The thought of giving 200k to the government makes me sick.
Any recommendations to avoid this? It appears my options are:
1. Keep and rent out, use new rent to help pay newer larger mortgage - thus expanding my real estate portfolio and then 1031 after a couple years.
2. Sell and just pay the tax and consider myself fortunate to be in this situation.
Anything else I am missing? Thank you in advance
All of the above options I read here are options which can be taken. Just read about Deferred Sales Trust... I don't think this wise to avoid tax to take installments pays in exchange.
Depending on person the lump sum of the sold property invested will make more over the years what you save in taxes today.
Another post suggest, taking out equity to the limit where you have to pay taxes and to the level where rent payment is covering the equity taken out make sense. But this is kicking the can down the road. The house will appreciate and if the kids inherit the property, they will be stuck in the same situation.
As some already suggested. Selling it, paying the taxes, invest the rest in a good portfolio, using that income to rent something or buy something nice is the way to go here. Don't make life difficult, saving 100-200k in taxes is not worth holding 2m hostage. Free that 2m and let them work. Those 100k-200k is are recouped in no time.
@Michael Thach if he just takes installment payments over 2 to 3 years just to keep him in the 15% bracket its not too bad. It saves 5% on the tax rate. Of course, assumes OP's income isn't super high. At that point it doesn't really matter then he'd be in the 20% anyway...
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Michael Thach:
As some already suggested. Selling it, paying the taxes, invest the rest in a good portfolio, using that income to rent something or buy something nice is the way to go here. Don't make life difficult, saving 100-200k in taxes is not worth holding 2m hostage. Free that 2m and let them work. Those 100k-200k is are recouped in no time.
one way of reducing tax obligation is smoothly preparing for PAL over the years so lets say you have aggregated 100K PAL it can be used to offset the profit when you sell the house but in this case the profit is way too high and since it comes from primary over 500k the choice is limited.
Thats one way to go, but isn't one effectively losing money? PAL is still just carried over losses. So, other than depreciation causing you to report a loss, you still need to be operating at a loss. Also, PAL doesn't directly offset capital gains or depreciation recapture. So, depending on whatever else OP might have going on with his return that year, it may get "wonky."
- Long Beach, CA · Member since 2016 · 22 posts · 4 votes2y
Quote from @Michael Thach:
Quote from @Ronin Crimmons:
First, thank you for any advice or recommendations. We would like to buy a bigger house and move up.
I am equity rich on my primary residence. Own free and clear with value estimate of 2.3 mil. My cost basis is 1.1 mil. If I sell, after realtor's fees and homeowner's exemption (500K), I would owe tax on 685K or almost 200k. The thought of giving 200k to the government makes me sick.
Any recommendations to avoid this? It appears my options are:
1. Keep and rent out, use new rent to help pay newer larger mortgage - thus expanding my real estate portfolio and then 1031 after a couple years.
2. Sell and just pay the tax and consider myself fortunate to be in this situation.
Anything else I am missing? Thank you in advance
All of the above options I read here are options which can be taken. Just read about Deferred Sales Trust... I don't think this wise to avoid tax to take installments pays in exchange.
Depending on person the lump sum of the sold property invested will make more over the years what you save in taxes today.
Another post suggest, taking out equity to the limit where you have to pay taxes and to the level where rent payment is covering the equity taken out make sense. But this is kicking the can down the road. The house will appreciate and if the kids inherit the property, they will be stuck in the same situation.
As some already suggested. Selling it, paying the taxes, invest the rest in a good portfolio, using that income to rent something or buy something nice is the way to go here. Don't make life difficult, saving 100-200k in taxes is not worth holding 2m hostage. Free that 2m and let them work. Those 100k-200k is are recouped in no time.
Thank you and makes sense. Appreciate the insight
- 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Ronin Crimmons, Several folks hit on the idea of converting to investment for a year and then selling and doing a 1031 exchange. What I didn't see is that you can actually do both a primary residence sale (tax free 500K) and a 1031 to defer the rest of the tax.
Move out, convert it to investment by whatever means you choose. After a year sell it. Take the first $500K of profit tax free (if you're married). And do a 1031 exchange on the rest.
The reason this works is that you qualify for both provisions.
1. The property you sold was an investment property so it qualifies for a 1031 exchange.
2. You have lived in the property for 2 out of the 5 years immediately prior to sale.
Since you qualify for both. You get to take both. Some profit tax free. the rest indefinitely tax deferred. Not a bad deal is it ??!!!
The 1031 Investor5140 Reviews - Long Beach, CA · Member since 2016 · 22 posts · 4 votes2y
Quote from @Dave Foster:
@Ronin Crimmons, Several folks hit on the idea of converting to investment for a year and then selling and doing a 1031 exchange. What I didn't see is that you can actually do both a primary residence sale (tax free 500K) and a 1031 to defer the rest of the tax.
Move out, convert it to investment by whatever means you choose. After a year sell it. Take the first $500K of profit tax free (if you're married). And do a 1031 exchange on the rest.
The reason this works is that you qualify for both provisions.
1. The property you sold was an investment property so it qualifies for a 1031 exchange.
2. You have lived in the property for 2 out of the 5 years immediately prior to sale.
Since you qualify for both. You get to take both. Some profit tax free. the rest indefinitely tax deferred. Not a bad deal is it ??!!!
If I took the 500K tax-free profit after 1 year of renting would the 1031 exchange value still have to be 2.3 mil or more OR could it be 1.8 mil or more?
@Dave Foster Since its as much as your sold and as much cash as you get... Is the boot's liability pro-rated or can you choose?
- 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Ronin Crimmons and @David M., This is the beautiful thing about being able to combine the two.
You're selling a property for 2.3 and doing a 1031 (let's just assume there was $ 1 mil of debt). That means you need to buy at least 2.3 in property and use all 1.3 in the purchase.
But you're going to take $500K boot. Normally this would be taxable because you are taking profit out. But you qualify to take $500K of profit tax free. So you get the $500K at the sale of your property. and your accountant reconciles that with the primary residence exemption.
Since you took $500K of profit out you now no longer have to buy 2.3. You now have to buy 1.8 in real estate using all $800K of cash left.
The 1031 Investor5140 Reviews
Join the conversationCreate a free account to reply, vote on answers and follow this thread.