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Tax Reform Bill - Do You really need to wait 5 Years?

Wednesday, December 13, 2017   /   by Geoffrey Zahler

Tax Reform Bill - Do You really need to wait 5 Years?

Hi all,
We just did a "ZP" Live on Facebook that covers this topic, so if you want to hear me ramble on camera - check out the YouTube Channel and the link here: ZPLive Episode 21 - Tax Reform Bill

**Disclaimer: I'm not a tax professional - you'll hear me say this a ton in the video and below**

So - Taxes - no one likes to pay them, and everyone is afraid of them now, but realistically, even if the Tax Reform is passed, it may not have the same impact on us here in the Las Vegas area as it does in other high cost areas.

Current Situation:
Currently, if you live in your home as a Primary Residence for 2 of the last 5 years, when it's time to sell, you will be able to sell and NOT pay any taxes on your Capital Gains, up to $250,000 of gains for a Single Filer, or $500,000 if you're married and file jointly.  That's not the TAX break, that's the amount of gains you would be protected from.  For instance, with very simple math, if you bought a home for $500,000 and sold it for $750,000 and filed individually, and have lived in the home for 2 years as a Primary Residence, the Gain would be $250,000 - you would NOT be taxed on those gains!  Capital Gains Tax is less than your ordinary income tax bracket, with most of us paying 15% on investments considered Capital Gains (in this case, an investment held longer than one year).

Follow me?

Proposal:
What is being thrown around in the new Tax Reform Bill is taking that 2 years out of the last 5, and increasing it to 5 years of the last 8, forcing homeowners to stay in their homes longer in order to keep the tax break.  This will prolong and essentially limit the tax incentive to those that were moving frequently, which of course, could stall the economic boom we've had since the Great Recession. 


People are freaking out, and yes, overall, this has been a GREAT tax incentive for us, and has helped speed recovery along - allowing homeowners to sell their homes, take the tax free money and put it back into the housing market at a faster clip.  I personally love the idea of being able to sell your home every two years, take the gains, not pay taxes, and move on - however, I haven't done it!  I know people that have, and I know some people, with job situations that are forced to transfer, are very happy about the current situation.  

But honestly - if this DOES pass - how much will it really hurt?  Let's jump into some examples (warning, Math ahead).

Pretend you purchased a Home for $200,000 and sold it for $300,000 after 2 years and a day.  Under the CURRENT tax plan, you'll be able to sing and dance, and not pay a DIME in taxes on that gain, which is AMAZING, because NO ONE LIKES PAYING TAXES!!!!!  Everyone feels rich and happy, and that they "won" against the government!

Under the proposed plan, you've only lived in the home 2 years, and are not eligible anymore for this savings!  Yikes!  Do you have to pay $100,000 in TAXES?  Of course not!  Let's break it down:

Purchased the home for $200,000 and sold it for $300,000 - this is a gross gain of $100,000.  Pretend you paid nothing to close on the house, and made no upgrades or updates to the home to help increase the cost basis of the property.  You're not in the highest tax bracket, so you pay 15% on Capital Gains.

15% of $100,000 = $15,000 Tax Bill when you sell your house!  Ouch, that doesn't feel good, because no one likes to pay taxes.  But, it's a little more complex than that, and there are ways to lessen this amount.

The IRS allows you to add any funds you put into the home to UPGRADE the property, and thus, increase your COST BASIS on the property.  So that $20,000 on a new master bathroom that almost cost you your marriage, and you wondered if you would EVER get that money back?  Well, you still won't, but you'll be able to soften your tax burden.  Pretend that's the ONLY upgrade you made on the home.

$200,000 Purchase + $20,000 addition (that master bath) = your Cost Basis is now $220,000.  Again, assuming a $300,000 sale amount, and the $220,000 basis, you're left with $80,000 now.

15% of $80,000 = $12,000 Tax Bill - you just cut that bill by $3,000!

Also, we all know that when you sell your property, your proceeds are less than what the "sales price" is - due to commissions, closing costs, etc.  I'm not a tax attorney, nor a CPA, so check with your local professional, but that will ALSO reduce the amount of potential Tax Burden.  Keeping the same exact scenario as Above, but adding this wrinkle...

$300,000 sales price - but you pay a Professional to help sell your home and normal closing costs and you maybe NET $276,000. 

$276,000 - $220,000 Cost Basis = $56,000 in Gains
15% of $56,000 = $8,400 Tax Bill!

In this example, I have taken what some people think of as a $100,000 Gain (and even smaller amount of people concerned with a $100,000 Tax Bill) and brought it down to $8,400!

Again, NO ONE, I repeat NO ONE, likes to pay Taxes, but this is a much smaller bill to deal with.  Plus, if you have other investments or losses, this Capital Gain may be offset by other investments (again, talk to your CPA).

So the question remains - If this plan does indeed pass, how much will this hurt?  If you have lived in your home for over 2 years, but not 5, and you have some gains, then yes, you WOULD have to pay the tax man, but not as much as some people think.  If you have lived in your home for over 5 years anyway, this really doesn't hurt you at all!  In fact, the average homeowner owns a property for 13 years, so this doesn't effect EVERYONE clearly.

If you've been in the home 2-2.5 years - again, you'll be upset because you may no longer be eligible, but we do know that the market is hot, we know you have a gain now, and maybe you want to move on with your life, upgrade, downgrade, relocate.  Is it worth sticking it out in a home that you've considered selling to save $8,400 in taxes, when we don't know what the future holds?  Probably not.  But everyone is different.  Now, if the law does pass, and you've lived in your home 4-4.5 years or so, and have good gains in the property because you bought at the bottom of a market - that may be the time, after talking with a professional, that you decide to hold off on selling until after the magic 5 year window!  Again, every owner has a different story, but working with a Professional that understands this, as well as a Tax Professional, is the best ingredient for a successful sale IF this tax reform is passed.

This is all still an "IF" situation - and we will know more as it transpires, and Zahler Properties will be sure to update everyone as anything does indeed pass and change.

If you have any questions on your specific situation, we would love to discuss your home with you and putting a proper plan together, and most importantly, to deliver the proper information to you to make an informed decision.

Until Next Time!
-Geoff Zahler

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