Hacker News Reader

Comment by gigawhat | Hacker News Reader

Weirdly, I own a house and think I'd be better off if prices fell-- fell a lot. I bought a few years ago and would be happy if prices uniformly dropped to those levels.

Why? I want a 50% bigger/nicer house in the same area. But bigger/nicer houses have increased in price proportionally to mine. So the gap in absolute dollars between what I have and what I want has expanded quite a bit. My income has increased, but not really enough to cover the gap.

Strong increasing prices really only help homeowners to the effect that they're eventually willing to downsize or move to a lower-cost area.

If prices rise strongly and proportionately I suspect it just causes stagnation. I can't really upgrade without a windfall, thus my house stays off the market. So other folks can't upgrade to my house.

View on HN

It's even worse than that. If your house has appreciated more than $250k (or $500k if you're married) then you have to pay capital gains tax on the rest. And this is a fixed amount regardless of how long you've owned your home, so the longer you stay, and the more your house appreciates, the greater the penalty when you ultimately sell.

I believe there's a two year minimum to get that capital gains exception, so you'd have to flip every two years.

"Penalty", yeah because people have put in sooo much hard work to make their house values go up. (Sure, some people will spend money on renovations, and there could be tax credits for that. But I don't think that sitting on an asset and letting it appreciate should be a free lunch.)

"Penalty" because someone who sells their house and buys a new one every time it appreciates $250k pays zero tax whereas someone who buys and holds pays significant tax despite having the same net gain over the same time period.

There's a two year minimum that you must hold the home to qualify for the exclusion. So it's not "every time" it appreciates, but it is "once every two years".

https://www.irs.gov/publications/p523/ar02.html#en_US_2015_p...

Seems simple to apply the tax rate pro-rata rather than on a cliff. Then the rule works more fairly and gaming is somewhat limited. Government seems to love rule cliffs for some reason.

Artifact of a pre-digital tax/legal system?

Sure, but that's just another manifestation of the same problem: someone who sells after 23 months and 29 days pays tax. Someone who sells three days later doesn't.

If someone actually tried to execute that sell and buy strategy the large transaction costs would eat up any possible tax savings.

Could one make the case that the liquidity this adds to the housing market justifies the tax savings?

OK, fair point. I think you're right, it should be all or nothing.

I am not a tax expert but I have heard that as long you put the appreciation money back into a house purchase, you can keep all the appreciation upto 500K tax free.

Yup, if married and you've been there a couple of years. $250k if single.

Still, almost anyone who bought a house a few years ago in the area is sitting on at least $500k in gains. So even if taxes on the remainder are arguably fair from a revenue perspective, they are another constraint on housing market liquidity.

There's two scenarios in which one can avoid or delay taxation when his home has appreciated:

1) $250k deduction if single ($500k deduction if married) during the year in which the capital gains has occurred.

2) Convert the property to a business and use a 1031 Like Kind Exchange in which 100% of the profits can be rolled into a new property and deferred until that property is liquidated or the gains are realized.

For 1), you must have owned the home for 2+ year to qualify. If you're moving under 2 years for a "qualified reason" (death, birth of multiples, 50+ miles closer to work) you can take a pro-rated deduction.

For 2), you cannot do a like-kind exchange for residential property that you live in as your primary home.

Yes, thanks for the clarifying points.

For (2), if you convert the residential property into a business by renting it out, at what point can you do a 1031?

The more expensive a property is, the less its price falls in bad times. Rich people are rarely forced to sell. It's a different market basically disconnected from the rest. I don't know what kind of house you want, but there's a nonlinearity there that might be important.

Levered people, whether rich or poor, are the ones who are forced to sell. There are always some over levered folks from both ends of the economic spectrum.

As long as you can make your monthly payments, you'll never be forced to sell.

That is not what I have seen in the bay area over the last few decades. The high end fluctuates quite a bit but the low end is steady and remains high. Much more competition for starter homes than higher end homes around here...

And to make explicit an obvious fact, because of Prop 13, revaluations on homes are only made when it's resold. A person whose family has owned a house for decades has very little incentive to ever move on.

Do you have some data to back this up?

Not to mention: Property taxes are "forever", even with Prop 13. In Santa Clara County, in the Bay Area, taxes are about 1%. So if your purchase price is $1,000,000, your taxes are about $10,000 per year, half payable in December and half in April.

They can go up a miniscule amount, 2%. So not exactly forever, but relatively close

Reply on news.ycombinator.com