If you own a house and want to move on, do you pull the trigger now and get on with your life, or wait for better days? This is the question that has led to record-breaking levels of “Pent Up Seller Demand.” This term applies to homeowners that want to sell their homes, but are concerned about suffering heavy losses. The logic behind waiting is that the real estate market is bound to recover, and when it does, prices will rebound.
How successful this strategy is likely to be is difficult to answer. If you consider serious world geo-political and economic issues, along with tremendous fiscal concerns in the United States, even the most optimistic homeowner will experience concern or doubt over waiting. All of these issues received lots of publicity on a weekly, if not daily basis. But there are serious tax considerations that are also looming. The risk of waiting to sell, cannot be adequately assessed with looking at the tax implication of waiting.
The best-informed decisions regarding real estate cannot be made without first considering the impact of the following tax issues:
- Capital Gains Tax Rate – The possibility of increased capital gains tax on the sale of real estate must be considered. Everyone knows the $16 Trillion deficit in the United States must be addressed. Many experts believe the favorable 15% tax rate enjoyed by homeowners cashing out of their real estate holdings with a profit, will be revised. It’s very possible that capital gains in the future will be taxed at the same rate as ordinary income. And, when you consider the marginal tax rate in 1986 was 50%, you begin to appreciate how delaying the sale of a home could impact your personal finances. If the marginal tax rate in the mid-1980’s was 50%, and as high as 70% in 1961, is it possible that we’re due for a significant increase in the tax rate in the coming years? If so, could you be losing tens of thousands, or even hundreds of thousands in taxes paid on the profit you made selling real estate held for a long period of time.
- Tax On Mortgage Debt Forgiveness – The most important tax-relieve provision enacted by Congress during the housing crisis to help financially strapped homeowners was the Mortgage Forgiveness Debt Relief Act. The Tax Code normally requires a homeowner to report any debt forgiveness granted by the bank as ordinary income. This means if your bank forgives $100,000 in debt by allowing you to short-sell your home for less than what you owe, the IRS will require you to count that forgiveness as if you earned $100,000 in income. The Debt Relief Act waives the tax liability due on the amount you owe the bank that they forgive. But, here’s the kicker, forgiveness only applies through December 31st of this year. If you’re thinking about short-selling, but haven’t made a final decision, the delay could cost you tens of thousands in additional tax liability if the Debt Relief Act isn’t extended.
- Health Care Law– If you’re a wealthy homeowner earning more than $250,000 per year, and will realize over $500,000 in profit from the sale of your home, in addition to paying higher capital gains tax, you may have to pay an additional 3.8% in taxes on excess profit. This provision was added to the health care law as a way to help fund the increasing costs of Medicare.
If you were wondering how on earth you pay for a $16 Trillion deficit, now you know. All options must be put on the table and considered. So, don’t be surprised if the extra taxes you pay waiting for real estate prices to recover, end up costing you far more than the extra profit you realize by waiting for real estate prices to recover. You may want to sell now, and sleep at night!