Primary residence capital gain tax dilemma

[Whenthetequilarunsout]

Long time reader, first time poster. I have found myself in a dilemma that I would appreciate some help with thanks to the impending tax reform.

My story: 8 months from finishing residency, likely doing a one year fellowship in another state. Will be matching in mid December. We bought a townhome for 260k 2.5 years ago, now worth 365-375k based on recent sales. I know what you're thinking - why did you buy as a resident - but it was in a hot market and rental prices were unaffordable in an area we wanted to live so we bit the bullet.

Now with tax reform looking to target the tax free capital gain sale of a primary residence, I'm wondering if we should cut our home loose to lock in the gain. The podcast mentioned the most recent tax reform proposal requires living in home 5 of last 8 years to be tax free. It seems to likely take effect January 1 if it passes. I was unclear if this was House or Senate bill (or both), and I realize it could change. But the way I see it, we have a few options:

A. Continue to live as we would otherwise and sell next June risking paying taxes on our capital gain

B. Quickly put our home on the market and try to sell before January 1, guaranteeing the tax free gain

C. Wait and see where I land for fellowship in mid December (95% chance out of state), then figure it out, which means likely listing Jan/Feb

The market is not quite as hot as it has been, but still hot enough to find a buyer within a few weeks. We may have to sell for less than our dream price but would still be able to lock in a sizable gain. If they institute this new 5/8 years to qualify for tax free gain, any chance they would grandfather in those of us who own prior to Jan 2018? If you have made it this far, thanks for your time.

[mobilehomegurl]

You might just want to wait and see before making a move. Usually, winter time is the slowest for real estate. Once you have an idea of where you'll end up, then you might want to look at different options. In the meantime, you could start talking to real estate agents to start building your network should you decide to list. Best of luck!  

[MrsIMDoc]

We are struggling with this too.  This likely is only affecting a small number of taxpayers, so it is likely this will get passed without being changed.  We thought about selling our rental in the next 6 weeks but ultimately decided that the rushed decision would be too much for us to manage remotely.  We have significant concerns that our rental being in a more university setting would not sell for as much in November as it would in the summer. So,  I do not have an answer for you but just wanted to say, "Sorry we are both in the same sucky boat".

[q-school]

Don’t let the tail wag the dog.
The final tax outcome is uncertain. Your job situation is uncertain. Housing market is uncertain.
It will already be a stressful time.

Remember there is already a profit. I can’t tell you how many houses we sold under water and had to bring a check to closing.

[GXA]

After you pay for real estate and transaction costs, your capital gain will be about 80k-90k.  With your salary at a resident/fellow level, I assume your capital gains tax rate will be no more than 15%. 

The potential 12-13k savings in taxes would then have to be offset by renting a place for the last 6 months of your residency as well as the cost and hassles of moving one additional time.  In fact, as mentioned above, winter is generally slow for real estate, and it may be possible to sell for a little more in the spring.

[hightower]

GXA wrote:

After you pay for real estate and transaction costs, your capital gain will be about 80k-90k.  With your salary at a resident/fellow level, I assume your capital gains tax rate will be no more than 15%. 

The potential 12-13k savings in taxes would then have to be offset by renting a place for the last 6 months of your residency as well as the cost and hassles of moving one additional time.  In fact, as mentioned above, winter is generally slow for real estate, and it may be possible to sell for a little more in the spring.

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I agree with this.  I would hold on to it if I were you.  No one knows what type of, if any, tax reform will pass.  No sense making a major financial decision based on proposed legislation.  Selling a place is a huge PITA and not something you want to be dealing with during residency.  Focus on getting a great job and worry about the condo later  If it passes and you end up having to pay a tax on the profits, oh well, that's life.  It won't make or break you.  Having a place you own and with a healthy amount of equity is far more valuable than worrying about a relatively small amount of profit loss.

Condo's can make great rental units later too btw.  I kind of regret selling the condo we owned in residency.  We could have easily rented it out as an airbnb and made a killing (the area it's in is a very popular downtown spot).  

[Whenthetequilarunsout]

Thanks for all of your insightful comments. We are going to hold onto it. Our added expenses from renting for 6 months would negate whatever amount we would save in capital gains tax. Plus, as several of you mentioned, there's the PITA factor of selling/moving and the chance that we may be able to sell for more in the spring.

[MrsIMDoc]

We all just found this article that states the senate bill might allow moving for a job.  http://money.cnn.com/2017/11/14/real_estate/house-senate-tax-reform-homeowners-buyers-seller/index.html

So hopefully, if you want to move for a job and buy similar priced homes then you will not be taxed on capital gains.

[Lithium]

Ugh.  Sounds like they aren't going to grandfather anyone in like they are with existing mortgages.  This sucks big time for me.  I was hoping to sell my house next year, ideally without a realtor.  Tough call for me about what to do, but the easiest thing would be to do nothing and hope that this doesn't pass.

[Hank]

Thanksgiving to Christmas is the worst time to sell a house and the best time to buy one. Only the most motivated sellers will keep the house in artificially pristine shape to show the house over the holidays. Everyone else will wait until the New Year.

[StarTrekDoc]

Don't put the cart before the horse.

We tend not to keep the house pristine show condition.  You will need to do this -- during the holidays -- in residency.   Tough chore, IMHO  You MAY get a good dollar and MAY get a leaseback for the end of the year, so you CAN do all this over the next six weeks if you want --- but it's not the norm.

Sell when you're ready -- profit is there already and market during the holidays is down right slow.

[RJ]

To OP: you think your issue is bad- I have $800K in capital gains of my primary residence in HCOL area. My plan was to sell it sometime next year and purchase a bigger place using proceeds from sale as a downpayment. Good thing is I will have 5 years in my primary residence next December. Bad thing is if the lower ceiling for mortgage deduction passes, I may not be able to justify moving at all. Confused and not sure what do do it this point.

[StarTrekDoc]

Solution:   Create LLC to buy new home and rent it to you.  full deduction on expenses -- including property taxes which is where it really hits hard.

[RJ]

Thank you StarTrekDoc,

This was mentioned to me before by a few people, but I still don't understand the mechanics. My wife and I are both MDs with 90% W2 income. We do have a shared S Corp with modest income from side gigs (consulting, med legal work, etc.). It receives approximately $50k per year of 1099 income and we are always working to expand that. When you say "create an LLC to buy new home and rent it to you ", can we use our existing LLC to do this or are you talking about brand new LLC? Or does this only apply to someone with large 1099 income? TIA!

[The White Coat Investor]

RJ wrote:

Thank you StarTrekDoc,

This was mentioned to me before by a few people, but I still don’t understand the mechanics. My wife and I are both MDs with 90% W2 income. We do have a shared S Corp with modest income from side gigs (consulting, med legal work, etc.). It receives approximately $50k per year of 1099 income and we are always working to expand that. When you say “create an LLC to buy new home and rent it to you “, can we use our existing LLC to do this or are you talking about brand new LLC? Or does this only apply to someone with large 1099 income? TIA!

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Why wouldn't the gains apply to the sale to the LLC?