Let's say your house is 1mn and stays 1mn. You have zero gains and pay zero taxes. Net cash in your bank = ZERO
Now your house becomes 2mn. So you have 1mn profit, first 500K is exempt. And you pay 25% on your next 500k. Net cash = 750K.
Are you suggesting that you would rather have zero dollars in your bank account than 750 K?
So if your house is 1m and 10 years later stays at 1m, then you can swap for any other house in the neighborhood.
If your house was 1m but in 10 years becomes 2m, and all the other houses in the neighborhood are now 2m... you would hypothetically not be able to swap for another home. You now have 1.75m to buy with. A good problem to have, no doubt.
AKA, if a prison opened up next to their current house keeping property values the same then they would be strictly worse off.
It is.
> yes it costs money but assuming you want to down size that should hardly be an issue.
Why? A loss is a loss. What difference does it make if it comes out of your checking account or your home equity?
There is no loss. There is only the money you get net after the sale.
Now, you can get into cash flow issues etc. But, with home interest being tax deductible and long term capital gains being below normal taxes your almost always better off over time to sell after a bubble than before.
PS: If your investment makes 4% and your mortgage is 5% then you have a net savings after taxes.
No, that's not true because the $500k cap gains exemption is per-transaction.
Reread what I said?
That's why 2 houses with 2 mill gains is better than 1 house with a 4 million gain.
Selling 1 house with a 4 million gain is one transaction with a 500k cap so you pay taxes on 3.5 million. But selling one house with a 2 million gain then another house with another 2 million gain is 2 transactions so you pay capital gains on 3 million and get an extra 500k tax free.
Remember, until you sell the second house it's value is meaningless but when do sell it's purchase price and value become important.
Yes, that's true, but it makes a move less efficient. If we sell our house and buy another one of equal value, the higher the price, the more we lose in capital gain tax in the transition. If our house had not appreciated, we would pay zero cap gains. The higher prices go, the more expensive it becomes to move locally.