Yes, I know. But our appreciation is substantially more than that. The higher it goes, the more expensive it becomes to make a move.
> which is less impactful since you've already made a profit on it
Only if we move to a less expensive area. If we make a local move, that "profit" just gets rolled in to the next house. There's no way to cash out without leaving the area.
> Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example).
Yes, exactly right. What we really want to do, but can't because it's too expensive, is downsize. This would not be the case if prices were stable.
I'm still not sure why exactly the issue is. You literally can afford to downsize and you'll make a ton of money doing so.
> If we make a local move, that "profit" just gets rolled in to the next house.
Huh? That's not how it works...
2008 - Buy house for $1M
2017 - Sell house for $2M
2017 - Buy new house for $1M (but smaller size)
Congrats you have an asset worth $1M you've just made $1M in cash. Now net out fees and you have a downsized home and are more liquid than you were before, but with slightly less wealth than you had yesterday (due to netting of fees associated with the transaction).
Assuming there's anything on the market for $1M. The problems start when there isn't.
> The problems start when there isn't.
And the market always opens up when there isn't because it means the demand goes higher and thus creates new sellers. That also "rises the tide" and increase everyone in the area's house prices. So it nets it self out.
Sure. But it might be $1.6 million, not $1 million, in your example...
Real-life numbers will differ, but that's roughly the point.
But there is a gain, you just turned an illiquid asset into a liquid asset. The fact that this exchange is even possible is why you are even able to say "its worth $2M" in the first place. If you couldn't turn an illiquid asset into a liquid asset it would be worth nothing, so you neither "gain" nor "lose". Would you rather have that scenario?
Lastly - if you see personal value in purchasing a smaller house, wouldn't you expect service providers (agents, movers, etc) to charge you for that value?
https://ttlc.intuit.com/questions/3229450-sold-primary-house...
https://www.irs.gov/taxtopics/tc701
Where's your source?
If you think that's incorrect, what do _you_ think happens with taxes when selling a home for $2 million that was bought for $1 million?
> I said = 2017 - Buy new house for $1M
> you said = But it might be (for the "buy new house") $1.6 million, not $1 million, in your example...
> I said = so they can still afford it.
> you said = You don't get to keep the whole $2M. That's the point.
So, let's do this again.
1. Sell house for $2M
2. Buy house for $1.6M as you suggested
3. Congrats you now have $1.6M in illiquid assets and $400k in liquid assets (cash)
Note - I recognize that my original example was buy at $1M and sell for $2M, where you are correct you're not taxed on the first $500k and the remaining $500k is taxed at capital gains. I also recognize that this whole scenario is purely illustrative and doesn't take into acount all of the transation fees.
Nope! This is all speculative until you need to "sell & move". If you want to move to another place in the same area, guess what, you've probably made nothing. With all the taxes and fees that you have to pay on the sale price you can't buy the equivalent of your house. You can only capitalize on that appreciation if you move somewhere considerably cheaper.
Not only that, the owner faces higher (in some cases much higher) property taxes due to increasing house prices, which is totally out of their control.
I'm not suggesting that they're in a bad spot. It's just not the "jackpot" that your post is suggesting.
So why on earth would someone want to sell their house and buy an equivalent house in the same area...?
Friend of mine bought a house he and his wife loved. Five years later he came to understand what owning a Dr Horton house means, and they wanted a better-built house.
But a lot of this is true with moving generally when you're living somewhere that's OK but isn't really optimal for you any longer.
Quite possibly, yes.
Let's plug in some plausible numbers. Say someone buys a 3-bedroom house for $300k (they have kids). At the same time, 1-bedroom houses sell for $200k.
Time passes, the kids grow up and move out. Say house prices didn't change at all. You sell for $300k, buy for $200k, pay some agent fees, have $85k or so left over.
Now say prices went up and the 3-bedroom house is $1,500,000. You sell, have a $1.2e6 capital gain. $500k is deductible, you pay taxes on the remaining $700k. That's taxed at 20% federal plus the ACA 3.8% investment income tax (because your income is way over that boundary) plus state capital gains taxes. In California, capital gains are taxed the same as other income, at first glance; let's be charitable and assume you avoid the higher tax brackets (12.3%) and get taxed at an effective 10% here. That's 33.8% tax. So your after-tax sale proceeds are $500k + 0.662*$700k = $963k.
Note that your house went up in price by 5x. If the smaller one did too, it costs $1 million and you can't pay for it anymore. If it went up by more than that (e.g. if the primary inflation was in land prices, which it often is) you might be even more in the hole.
Things are even worse if you're trying to sell and buy something equivalent instead of downsizing.
Gains greater than 500k are extremely rare outside of certain overly restrictively zoned areas.
Of course all that assumes that you're not leveraged at all (paid-off morgage). If you're leveraged, price increases are generally a win even in the face of capital gains taxes on the increase.
Discourse shouldn't be baselessly disrespectful, sure.
But the robotic, tsk tsk, shaming attitude that gets thrown around on forums whenever someone expresses any negative emotion gets old too.
In any case, complaining about having to pay capital gains tax on gains OVER $500k really is the ultimate first world, privileged problem.
If I were talking to lisper over a beer, I'd probably smile and say that that problem is one that 99% of the world's population would love to have, or something to that effect. Or maybe without the smile and straight to the point "complaining about profits so high that you're getting taxed on them when there are people who are homeless is not a great look".
OTOH, I don't think he's really complaining, just pointing out that the system is pretty screwy even for someone who is in no uncertain terms doing pretty well.
Almost every complaint levied on this forum is a first world problem. Complaining about the ergonomics of a programming language is a first world problem. And secondly, he wasn't complaining, he was describing the economics of his choices. What is infinitely more toxic than 'complaining' about first world problems, is people jumping on explanations like the above as 'complaints' that need to be silenced.
That's just like, your opinion man.
>Complaining about the ergonomics
Look, complaining about work is a typical first world problem, sure. And of course we're all lucky to do the work we do and not live in [wherever.]
Complaining about 20% taxes on $200k of a ~$700k windfall is truly more like a .00001% issue and is pretty obtuse by any measure.
You wouldn't raise an eyebrow, or have any negative reaction to someone making $400k / year bitterly complaining that they have to pay taxes on it? I don't know anyone who wouldn't think that was obnoxious.
>he was describing the economics of his choices.
Sort of, in a fairly facile and borderline deceptive manner.
Where are these bitter complaints? He commented to say that rising housing prices weren't good for him. He explained why. That isn't a complaint. He didn't say "I deserve this money from my rising house price!". He didn't say "the world is so unfair to me". He just explained why this thing that people thought would be helpful to someone like him, was in fact, not helpful.
> Sort of, in a fairly facile and borderline deceptive manner.
What was facile or deceptive about what he said? He's absolutely correct.
First, he withheld the amount of capital gains, so everyone who initially responded naturally assumed it was under $500k, which is true of 99.9% of transactions. That was very misleading information to omit.
Secondly, he complained about broker fees, but it isn't required to sell a house using a broker by any stretch. Just do FSBO if you think the 3% cut (probably less) isn't worth it. And 3% isn't much at all when your already expensive house just went up over 100% in value. Facile and disingenuous.
>Where are these bitter complaints?
Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."
>we can't afford to move!
Lies. They could easily afford to move.
They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.
I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings.
THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.
There's nothing misleading about that. He didn't mislead you. You misled you.
> Pretending that he and his wife are "trapped" in his house and "can't afford to sell" makes it sound like a horrific and dire situation. Which is completely misleading, he and his wife are quite wealthy and could do anything they wanted. They are pretty much the opposite of "trapped."
You don't really understand money, it seems like. The fact that you have equity in the home you live in doesn't mean you can "do anything you want". I already explained why this is so.
> They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% taxes on the $200k, so $40k and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around, subtract $500k to pay off the existing mortgage, that's $700k free and clear. $700k is a hell of a down-payment, even in the ritziest areas of Marin. Buy whatever you want.
700k is indeed a great down payment. But you have no idea what their income stream is like. If they aren't making a large income, they won't be able to afford their mortgage payments if they need to buy a house in an expensive area like SF. What he means by 'trapped' is that they have theoretically made all this money, but the money is of no actual use to them. And he is completely correct.
> I own a restaurant in norcal and have an employee whose room share / rental house burned in the recent fires. He goes to SRJC, doesn't have any family in the area, had no rental insurance, makes $12 an hour and no savings. THAT's a dire situation, and considering I know people in situations like that, OP's framing of his (extremely cushy) situation as "I can't afford X!" is pretty disgusting to me.
Gee, it does indeed sound dire. Maybe you should pay your employees more rather than yelling at people on the internet for being insensitive about money? Seems you're in a position to actually do something about that situation. But you won't. And there's a very good reason you won't: because it's bad business. The economics don't make sense for you to do that. Just like the economics of the OP's situation don't make him wealthy. Absolute values are irrelevant, it's the equilibrium that matters.
And secondly, making silly statements like "THATS NOT DIRE THIS IS DIRE" is absurd. Almost everyone posting here lives in a first world country. There are infinitely 'more dire' situations out there than any of us are in, and playing this childish 'no true scotsman' game is a waste of time.
The OP is using him or herself as an example of a real behavior in response to real economic incentives, no matter how unsympathetic you find their circumstance. The fact that this situation discourages moves that most other markets encourage is a worthwhile point to bring up. Among other things, it reduces supply which has a profound effect on new buyers.
Incentives influence actions much more than personal criticism does. The OP’s relatively fortunate outcome does not mean that they don’t have something relevant to share. In contrast, targeting them with pejorative shaming is totally unhelpful.
They bought their house for something like $600k and now it's probably worth $1.3M. They pay 20% capital gains taxes on $200k, so $40k, and they lose 3% if they use a broker. That's another $40k, so $80k total. Let's make it an even $100k. So they have $1.2M to throw around after the sale. Subtract $500k to pay off the existing mortgage, that's $700k free and clear.
$700k is a hell of a down-payment, even in the ritziest areas of Marin. They can buy whatever they want.
Why is expressing emotional reactions pointless, in your mind? Doing so gives everyone more information about the reactions they might expect to their concerns... it enforces social norms, etc.
The problem is that the comment provides nothing else. You can do the same thing in a more civil and constructive way. Just look at your comments. You are providing logic and rationale for your argument. I don't agree with you, but you're adding to the discussion. Now compare that to "I'm sick of you people. Stop whining about other people's comments you big baby". Someone can correct me, but that doesn't belong here and that rule has been around since the beginning of HN. It's been written and clear along with the reasons why. It's the way things have been done here. If someone doesn't like it, they can post on reddit instead.
https://news.ycombinator.com/newsguidelines.html
"Be civil. Don't say things you wouldn't say face-to-face. Don't be snarky. Comments should get more civil and substantive, not less, as a topic gets more divisive.
When disagreeing, please reply to the argument instead of calling names. 'That is idiotic; 1 + 1 is 2, not 3' can be shortened to '1 + 1 is 2, not 3.'"
I just believe the rules tend to stifle people from expressing how they truly feel about topics, and are therefore information limiting and generally a net loss.
It's a fine line. Some people's feelings are toxic all the time and wrong-headed and truly add nothing of value. Other people, when they have a negative emotional reaction there is probably a lot of accumulated wisdom behind it and you should really listen instead of censoring or rambling on about civility. Very subjective though.
Also, in my opinion, the constant suppression of any negative speech is exactly what gets someone like Trump elected. "Finally, someone on TV is saying what I FEEL and no one can stop him!"
Since a rising tide lifts all boats, the new purchase is about even with the old sale- but they also owe taxes. So within this window, they are objectively worse off than your average Joe who can move across town without owning those taxes.
Anyone trading up is also impacted as well. Suppose you bought a condo at 100k, and SFH was 200k. In five years you want to trade up, but the market went up 100%. Your condo sells for 200k, but the SFH costs 400k. Despite the lovely appreciation on your condo, you'd probably prefer if the market hadn't moved.
Sure, there's people who have it worse. Owning any home at all puts them in better shape than most of the world. But it's still not enviable to be unable to move within your community.
When a suit or Talbots customer argues over a price at Wal-Mart you should hear the similar type of tone the cashier takes after they leave. Especially if they argue for a buck or two.
This is real world
But CA Prop 60 allows Californians over 55 to downsize their house and maintain the same tax basis they had before the exchange, which very well might apply here, although IIRC it has weird county by county restrictions.
The ratio of profit you make moving from a $2m house to a $1m house is the same as moving from a $200k house to a $100k house in a "stable" area.
We put a certain positive intrinsic value on a local move (and a very high negative intrinsic value on a remote move), because we like the area but the house we're in is not ideal. If the cost of a local move is less than this intrinsic value, we'll move, otherwise we won't. The higher prices go, the higher the actual cost of moving goes, and the less likely we are to move.
Sans CA taxes, this is relative to the increase of wealth you've accumulated. So yes in the absolute it's higher, but relatively speaking you've still are earning more money in liquidity during the transaction.
> This has to do with the actual cost of a move, that is, the difference in your net worth at the end of the day once all the dust settles.
I think I finally understand your position now. The cost isn't prohibitive, it's the negative impact on your wealth. Which is true. The reason I and others are reacting strongly to your position is because your conflating transactional costs (expenses, fees, etc) with wealth (accumulation of assets). Two very different things that use a common medium to interact (i.e. currency).
Here's the predicament. Your implying that you can transfer assets (wealth) without any transactional costs. This is just not how the market for any asset transfer works (stocks, cash, etc), because someone or some system has to be setup to broker the transaction. What your essentially complaining about is why you have to pay fees to complete an asset transfer. I know very few markets were transferring assets doesn't incur a fee. I don't know what to tell you other than this is basically economics 101.
CA taxes on the other hand - that's something to complain about. CA taxes inadvertently nudge people to hold on to property longer, reducing supply and thus driving overall prices up.
So? How does that benefit us in any way? We don't need to sell to have liquidity. We have a HELOC so we can turn our equity into cash on demand.
> your conflating transactional costs (expenses, fees, etc) with wealth
No, I'm not. I'm just saying that transactional costs decrease your wealth, which is simply a fact.
> The cost isn't prohibitive, it's the negative impact on your wealth
What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.
Do you really feel like you'd be better off if your house sold for exactly what you bought it for?
But that HELOC has financing terms associated with it. Getting cash out from your HELOC does impact your overall "wealth" because you have to pay a fee (financing terms) to actual turn that credit line into cash. You could in turn take that cash that you borrowed at 3% interest and put it into assets that net you 4% return and effectively increase your wealth. You may take a short term hit to your income (the 3% interest fee) but you net out in the end.
> I'm just saying that transactional costs decrease your wealth, which is simply a fact.
That's not true in real terms. Your talking about a decrease of your perceived wealth. If the only asset I own is $1,000 in public traded stocks (i.e. I look at the stock market this second and they're worth $1,000), you could say your wealth is $1,000, but only for that second. However in practice your real wealth is the amount someone is willing to pay for your assets (when you put a sell order out) minus the transaction fees associated with making the transaction. That's the actual process ("in real terms") you would go through to realize your wealth.
This is effectively what people say when someone is "paper rich" E.g. a startup founder who has 30% of a business that is worth $300M, now has wealth valued at $90M...if he/she were actually liquidate to a seller at $300M, his/her wealth would probably be more like $40M-ish after taxes, transaction fees, etc.
> What exactly is the difference between "cost" and "negative impact on your wealth"? Those two seem like the same thing to me.
I should have probably said income instead instead of "cost". From wikipedia:[0]
Economic terminology distinguishes between wealth and income. Wealth or savings is a stock variable, that is, measurable at a date in time, for example the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow variable. What marks the income as a flow is its measurement per unit of time, such as the value of apples yielded from the orchard per year.
In other words, your wealth is measurable at a moment in time and can't realize a true negative impact on it unless it actually gets liquidated. Otherwise the measurement of it today is simply theoretical.
>Yes, this is a bitch in CA...see next point.
Property taxes in CA are extremely low.
https://en.wikipedia.org/wiki/California_Proposition_13_(197...
[1] http://www.boe.ca.gov/proptaxes/faqs/propositions60_90.htm
> 1. Capital gains tax
Note - if it's your primary residence you get capital gains relief on the first $500k.
> 2. Real estate agent fees
If you're in the bay area, then you negotiate these down to the minimum (IIRC 2.5%) because the market is so liquid and the agents add very little value (if you're smart). Also, you can negotiate not to pay the commission if you're the buyer. So the only burden is on the sale, which is less impactful since you've already made a profit on it.
> 3. Higher property taxes
Yes, this is a bitch in CA...see next point.
> we can't afford to move!
Clarification - you can't afford to move in the general vicinity, but you could certainly move to Nevada (for example). If you are not viewing your house as an investment, then guess what? You get to live in an area that is high demand! Good for you for timing the market appropriately when you bought.