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Comment by lisper | Hacker News Reader

Just to be clear, we didn't buy this house as an investment, we bought it to live in. We're actually hoping for prices to come down so we can downsize without taking a huge financial hit in the process.

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But you're not taking a hit really. You just think your are. You have made a profit still if you sell your house, tax the hit in capital gains and buy another place. It's not as much profit as without the capital gains but it's a lot more profit then if you took that original house price money and put it in a mattress. Hell that's even more money then just sticking it in the bank and getting a small interest rate.

You're not taking a financial hit, you just feel as you are. You think the capital gains tax is taking out a huge financial hit on something you already made lots of profit from. So you're still making a profit just not the one you imagined you were making.

That's like someone seeing their pay for the first and releasing the difference between gross pay and net pay. They think they are getting X but really they are getting Y. Both amounts of which are > 0 and so they are still making money. Like you still are.

Why not rent this one out and then rent a smaller place yourselves? Anyways, this is a good problem to have. I don't think 1.) and 2.) justify wanting prices to come down since they only affect a % of your appreciation.

Because we don't want to be landlords. And yes, it's a nice problem to have, but it's still a problem.

You get a property manager. The net cash flow is going to be much higher than the mortgage payment and the tenants pay the mortgage. Or, if it’s paid for, you do the same thing except cash out equity, let the tenants pay the equity loan, use that loan to buy the house you want to live in, take a deduction on the interest and you end up with two houses — both paid for by someone else and with a property manager you don’t have to fix toilets. Since you aren’t selling anything, you have no cap gains AND you can deduct depreciation from the rental income which means you end up paying no taxes on the rental income. With Valley housing in short supply you probably have at most an average on 1 month per year of vacancy — if that.

Then if you ultimately sell both houses, you can do a 1031 exchange and invest all of the proceeds into a new house — and defer the cap gains until you sell that.

These problems aren’t that hard unless you look at them from a single direction.

Won't you only pay a % of the gain in price in tax? In that case you're strictly worse if it goes down in price. You'd pay less tax, yes, but as tax is % of gains you're net worse off. If this really isn't the case can you share some example numbers showing how you can be worse off with a house that's worth more?

Suppose we bought our house for $1M and now it's worth $2M. We have to pay 25% cap gains (federal + state) on $500k so it costs us $125k to move to a house of equal value. If prices were stable, we could move without taking that hit. The higher prices go, the higher the cost of moving.

You are better off unless you bought the large house for cash. Otherwise, you made a big gain in leveraged terms.

What you say is true, but it misses the point, which is that big gains only help you if you actually cash out. If you're making a lateral move, or downsizing in the same area, it doesn't matter whether you're leveraged or not. A loss is still a loss.

The example is useful, thanks. I see that there's $125k of cap gains to pay for a move to a property of the same price. You're calling that a loss though, and I'm not sure I see it that way. Sure, if house prices hadn't gone up you could have moved from a $1M house to another $1M house and paid nothing. But in your example you're still $875k "in profit", so it's not really a loss, it's just a cost associated with a lateral move in the same area. If you downsize you actually realize some of those gains - of course not all of them because tax must be paid, but there's no avoiding taxes :)

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