Column: What to Do When Love Gets Complicated…
What to Do When Love Gets Complicated – Is It Time to Sell Your House (or Rent)
By Mark Pruner
This being Valentine’s Day week, I was thinking of things that people love and figure that most people love their homes. The memories made there are often some of the best of their lives; family holidays, baby’s first steps, some great parties, just sitting down to dinner with family night after night makes for a wonderful bond with your home. But what do you do when the house is too small, or too large, or just too expensive?
When is the Best Time to Sell Your House?
If you are thinking about a move more than a year out, you have some time to do some planning to maximize the return on your house. Right now, we are at the beginning of the spring market and as well as love, many people’s hearts turn to relocation in the Spring. So, is the spring market always, the best time to put your house on the market? For many people the answer is yes as that is when we see the largest number of deals made, but that’s not always the case.
We do have a good, albeit smaller, fall market that starts right after Labor Day. However, what you want to ideally do is put your house on the market when demand is greater than supply and that can happen at anytime of the year, that’s just a matter of having your Realtor look at the numbers. If your house is one of the few that is coming on the market and dealings being done are above average, even December can be a good time to put your house on the market.
Thinking in advance also gives you time to fix up the house, declutter the inside and stage it, either with mostly your own stuff or with furniture that the stager brings in. Painting the exterior and interior can really help a house look more presentable and well cared for. While most houses sell better when they have furniture in them, houses that are very cluttered or whose interior doesn’t match today’s buyer for that house may sell better when lightly staged or even empty. Another nice feature of moving first and selling second is that you don’t have to keep your home ready to be shown at a moment’s notice.
Should You Renovate Your House?
In general, you don’t want to do major renovations to make the house more saleable. I one time had a prospective seller proudly show me before and after pictures of a just renovated upstairs guest bathroom as a key selling point. The problem was the kitchen and the other bathrooms were badly dated, so the money might have been better spent on redoing the floors and brightening what was a dark house.
If you are planning on staying in your house for several more years, but are considering doing renovations, consider how they will add to the value of the house and to its future salability. Taking a traditional floorplan and opening it up and putting in the new kitchen that you have always wanted, makes you happy and also makes the house easier to sell. The one caveat is not to go to far in customization. I had a client who had customized bathroom tiles made in Italy for the boys’ bathroom. They had frogs, snakes and undersea creatures in full relief; cute, but they creeped out some people.
Can You Afford to Sell Your House?
In the pre-recession days, people nearly always sold their house for a nice gain and had plenty of money to go around to pay costs and have a nice downpayment for their next place. In today’s world, and particularly for those people that bought at the height of the market in 2004 – 2008 that may not be the case. For sellers, you need to be able to payoff the mortgage, pay your attorney and broker and pay two taxes that many sellers don’t think about.
CT Conveyance Taxes
Connecticut imposes a conveyance tax on sellers of homes. The tax is 0.75% under $800,000 and 1.25% over that amount plus a 0.25% town tax or a total of 1% below $800K and 1.5% over $800K. On our median $1.8 million dollar sale that comes to $23,000. Starting in July of this year the state will impose an additional 2.25% tax on the sale amount over $2.5 million. If you stay in the state after you sell your house, you will get back the additional tax starting in 2023. What we will clearly see this year is bump up on in June sales and a drop in July sales just as we saw in 2011, when the state conveyance tax was increased by 0.25%.
U.S. Capital Gains Taxes
The other tax that most people don’t pay on the sale of their home is the federal capital gains tax. This is because of the $250,000 tax exemption for each person and $500,000 for a couple. For anyone who bought in the Greenwich in the 1980s or before they almost certainly have this much gain even for our lowest priced houses. For our higher priced houses sellers may find that that in addition to the 20% capital gains tax they are also paying the additional 3.8% Obamacare surcharge. Now as my mom used to tell my dad, not everything is about taxes and even in worse case situation you still keep over 75% of the gain above the $500,000 exemption.
One thing that sometimes surprises people is that you don’t get to deduct the mortgage payoff in calculation your gain. So if you bought a house a long time ago for $100,000 and you sell it this year for $1,100,000 and you refinanced several times up to say an $800,000 mortgage, you still have to pay taxes on a $1,000,000 gain even though you are only netting $300,000 after the mortgage is paid off.
If however you used the money from the refinancings to do $500,000 of improvements over the years, you would owe no capital gains taxes. This is because your basis is $600,000; your $100,000 purchase price plus your $500,000 of capital improvements. Just make sure you have your invoices for capital improvements in case the IRS wants to see them.
Delaying Capital Gains Taxes
One additional option that you know have to delay paying the capital gains on your house is to take the taxable portion of the proceeds and reinvest them in an opportunity zone fund. We really should have a one time unlimited exemption for the gain on sale of your primary residence when you retire. For many people, their house was their primary way of savings for their retirement.
How to Make Money While Downsizing
Now if you are downsizing many people think of their new home as the last home that they will ever own. This has led to tennis buddies of mine in their 70s who are highly mobile on the tennis court insisting that they only want me to show them downsized houses with a first floor master, because eventually they aren’t going to be able to do stairs. The $500,000 capital gains tax exemption does lead to a good opportunity for retirement planning. Simply, buy a house that needs work, fix it up and live in it for a couple of years, or more, and get up to $500,000 of capital gains tax free, then you can retire to Edgehill or Florida with a better nest egg.
Should Rent or Sell My House?
The biggest owners of multi-family duplexes and triplexes in Greenwich are Greenwich residents. Lots of doctors, lawyers and financial people like having a steady source of income and income-producing real estate in their portfolios. What about renting your home? It can be a good source income and you can shelter some of the income with tax depreciation.
On the flip side, you have all the responsibilities of a landlord. You will also lose the personal residence $500,000 exemption after three years since you won’t have lived in the house for 2 of the last 5 years.
Can I deduct a Long Term Capital Loss if I Convert to a Rental Property?
One thing that you might think works, but doesn’t, is converting your house to a rental in order to take a long term capital loss on the house. Normally, losses on your personal residence are not deductible as they are treated a personal losses. If you convert it to a rental property, your basis in the rental property becomes the fair market value on the date it became a rental. If the value were to continue to drop after that date you could take that loss, however, you must first recapture any excess depreciation, which may reduce your tax loss.
As a rental, your house can be a reliable source of income for years, but don’t forget that depreciation is not just a tax concept. When it come times to sell or re-rent a rental property, you will have some fix-up costs if you want to get the best value.
When deciding between renting, selling or renovating, I always tell my clients to decide what is going to make you the happiest. What’s the use of having more money, if it makes you more unhappy, because you are stuck in the wrong. If a new house will make you happier and you have the funds, why wait for years to do something that will make your life better now?
Mark Pruner is an award winning Realtor with Berkshire Hathaway in Greenwich, CT. He is also a director of their New Development Group. He can be reached at 203-969-7900 or firstname.lastname@example.org