The long term capital gains savings is irrelevant unless he knows he plans to sell in near future and do not wish to re-enter RE market for investment. Or his re-investment is in completely different type of RE.
Let’s say he keeps current house and sells for $2M in the future.
Buy -$700k
Sell $2000k
Commission -$120k
Gain $1180k
Tax -$117k
Net $1003k
Then in another scenario, he sells $1.2M today; buys another house at $1.2M; and then sells in future for $2M.
Buy -$700k
Sell $1200k
Commission -$72k
Gain $428k
Tax -$64.2k
Net $363.8k
Buy -$1200k
Sell $2000k
Commission -$120k
Gain $680k
Tax -$102k
Net $578k
Total net is $941.8k
Keeping the current house will result in higher net, instead of paying sales commission twice (6% at sale price), if everything else being equal.
I graduated right before the dotcom bust. My first investment was Dell stock…I bought a house right away too. Michigan real estate crashed years before the great recession.
Now is a great time to sell…Especially if you have had great gains…It is ok to take some profits off the table…Besides being a landlord is not for everyone. …
I hate using future assumed input to do analysis. We don’t know the future. Anything can happen. $500k capital gain exempt means $$$ savings in tax. Hard to make so much. If do like wuqijun invests in stock, and may be end up loss $100k which is claimable through future gain. However, if don’t take $500k now, they become taxable, and you have to lose all of $500k before having claimable capital loss.
The $500k gift won’t be around forever…Take it early and often. .It made me rich…I will always thank Bill Clinton for that…I call it the Clinton economic recovery act for builders and flippers…lol
I was in a similar position a few months ago. As Elt1 recommends, I sold and took the $500k gift. I will try buying a rental outside the bay area in a few years.
We see this investment point of view or gain/value or effective use of money.
He sees mortgage means tie with big loan, and a commitment to stay in same place.
If he rents, he can move out easily anywhere in the world, no need to think about Long term asset appreciation etc.
He wants use his money and enjoy the world he wants rather than savings or tie up with mortgage.
He is too young, millennials, to appreciate the missing chance, even though he is intelligent enough to understand the details later. He does not have family.
He was not even ready to contribute Roth IRA or 401k. Finally, he agreed to contribute 401k up to company match !
All I can say this is a generation gap, millennials vs baby boomers !
Few more points to consider paying down primary home loan when you decide to sell first one.
The maximum loan for which mortgage interest tax deduction allowed is 1.1M loan. Anything above 1.1M loan should not be tax deducted as per IRS. I hope you know this limit.
With your pay 300k level, you will be paying hefty state tax. State tax+Mortgage tax deduction will be accounted for itemized deduction. You will eventually exceed the limit of itemized deduction even with pro-rata 1.1M Mortgage tax deduction.
Even otherwise, with high state tax+Mortgage tax deduction, you will hit AMT (alternative minimum tax). Unless Rep/Trump removes this AMT limit, there is no use of paying high amount of mortgage interest.
I am aware of the 1.1M loan limit. I was assuming any amount of interest on 1.1M loan is tax deductible and AMT does not matter here. However, property tax and state income tax may not be tax deductible due to AMT kicking in. Is my understanding correct ?
No one knows if it’s a missed opportunity or a fortune in disguise until the end. And missing an opportunity doesn’t equate conservatisim; it might just mean the investor does not believe in the market. All I can say is, good luck wuqijun
There was error in my previous post. The tax was taken out in 2nd scenario’s 1st sale. If you take the $500k gain and save $64.2k in tax, then the comparison is $1003k net for not selling versus $1006k net for selling and buying another similar property. So the extra trouble of making additional transaction results in $3k delta. Not worth the time and effort. There can be transaction cost and lost income during transaction. Unless you decide to move to different type of investment.
Ok, if I calculated that right, your assets stand at $1.2M + 1.95 + .2 + .1 + .5 = $3.95M.
At such a young age, your mentality should be to maximize your assets, not minimizing debt or tax payments.
As such, selling your $1.2M home is a bad idea because it will instantly reduce your asset holdings to $2.75M.
If you were to sell your home and made $500k, you would need to marginize 100% of that cash to bring your asset level close to what you had before. Having $1M in stock is actually better than owning $1.2M real estate because stocks appreciate faster than real estate.
On the other hand, you can utilize your $500k proceed to buy an even bigger home, maybe another $2M home, assuming you can borrow another $1.5M from the bank. That way you can increase your asset holdings to almost $5M!
The worst thing you can do is to sell the house and use the proceeds to pay off debt. You will have reduced your asset holdings to a measly $2.75M, like I stated before.
