Do you have rooms in your home that you have not seen in months because it’s just the two of you left since the kids moved out? Are you are starting to see the appeal of your friends on Facebook who have moved to the beach or bought a low maintenance luxury condo freeing up their time for fun stuff? I am going to discuss five ideas for downsizing and strengthening your negotiating position when purchasing your new home.
#1 Consult with your CPA and/or lawyer
I have sadly seen people lose thousands of dollars due to not taking the time to sit down with their CPA and/or lawyer and go through the details of a real estate strategy. They see the big picture and are trained to navigate the best course to save you the most amount of money in accomplishing your goals. It is a wise idea to run the following ideas by your CPA/Attorney before doing anything. We can offer local recommendations.
#2 Check if you qualify for the $250,000 tax exclusion ( $500,000 if married)
The first $250,000/$500,000 of Capital Gains can be tax free. The general rule is that you qualify for a 121 exclusion when you live in the property for two of the last five years. There are some situations that would disqualify the seller from this, so you need to confirm with your CPA/attorney.
#3 Transfer your property taxes to a new property
A big consideration for Santa Clara County sellers who have owned a property for many years is the increase of property taxes for a new home. Due to Prop 13 homeowners property taxes can only rise 2% per year, even though in most cases, the actual values have outpaced the 2% which has kept property taxes very low. Proposition 60 and 90 allow California homeowners over 55 to transfer their current taxes to another property. The only caveat is that moving out of the county you live in has restrictions. There are only 11 counties at this time that cooperate in “Intercounty Transfers” Click here to see the cooperating Counties
#4 Trade your rental properties to where you want to retire
So you have a rental property with lots of equity and if you sell it you will get hit with capital gains. The tax code 1031 allows for trading that home to another “like kind” home which normally means another rental. There are some restrictions when you can move into it as a personal residence. Rule of thumb is that it needs to be a rental for 2 years and then you can move in. There are different opinions on this, but the only one that matters is your CPA/attorney, for if something is disputed then they are there to defend the position. The benefit of this is the ability to leverage the full power of your equity in purchasing a new home as opposed to post tax proceeds. Now be careful, if done incorrectly, your exchange can be disqualified and a pretty hefty tax bill can follow.
#5 Pull money out of your current home to purchase the new one
There are so many strategies to make this happen and placing you in “opportunities way”. Taking a credit line, refinancing the current loan, or doing a bridge loan can be a solution. Credit lines can be useful if you only use what you borrow as opposed to getting a large chuck that you need to pay interest on. The rate is a little higher, but the balance could be lower. Refinancing could be the ticket with the low rates we currently have. The are some restrictions with the new tax laws in regards to what is deductible so consult you professional. Lastly, bridge loans are more of a short term solution. It is meant as an avenue for you to sell the current home right after buying the new one.
All of these solutions are meant to strengthen your negotiating position when purchasing your new home.
The Myrick Estates Team members are here to lend ideas, advice and help you make the next step in your real estate strategy.
Jim Myrick, Team Leader