Q: Q: I am 34 years old, single, and I have a good job. I bought a new house just about a year ago. The same house across the street just sold for $110,000 more than I paid for it. Should I sell? I put 12 percent down on the property when I purchased it.
A: That’s one heck of a return. I know about a million homeowners who would love to be in your situation. It sounds like you’ve lucked into something that could certainly help secure your financial future.
What I’d like to see you do is stay in your home for another year because of all the cash you’ll save on taxes. Current tax law permits you to keep up to $250,000 in profits tax free (up to $500,000 if you’re married) provided you have lived in the home as your personal residence for at least two of the past five years.
Since you’ve only lived in your house for a year, your gain would be treated as ordinary income unless you are selling due to a divorce or death, a job change (and the new job has to be at least 50 miles from your old job) or certain health issues.
Wanting to stick your huge profit in your pocket now before the market collapses wouldn’t qualify under those exception, I’m afraid.
If it looks like the property will hold its value for at least another year (if not go up in value more), then you ought to stay put for another 12 months and plan to sell the house on your 2-year anniversary in order to pocket more of the profit.
If you sold before the end of your second year of ownership, you might have to pay capital gains tax on any profit of about 15 percent versus your marginal federal tax rate which could be as high as 36 percent. In your case, you’d pocket an extra $20,000.
On the other hand, if you think property values will take a nosedive in the next 12 months, you have to weigh the cost of sticking around another year. If you sell now, you’ll pay more in tax, but if property values fall, you could lose a lot of that profit — although what you have will be tax free.
While you’re noodling all this over, you might want to talk to a financial planner about what to do with your windfall after you sell. While you could plow all the profits into a bigger property, you may want to see if you can buy something else you like for not a lot of cash and put the excess into either a rental property or a diversified portfolio of stocks and bonds.
You’d be wise to buy a few hours of a planner’s time to look at your assets and liabilities and develop a financial plan for your future.
Published: Oct 29, 2004