It’s cash-for-clunkers time in the real estate market.
Last week, in addition to extending the $8,000 first-time home-buyers tax credit for another six months, Congress added a new $6,500 tax-credit for move-up buyers.
The credit can be applied for homes selling for as much as $800,000, and the income limits exclude almost nobody.
You have to have lived in your home for more than five years out of the last eight, but that’s hardly an onerous restriction. And homeowners who have put down roots have equity.
Remember that capital gains on your primary residence are excluded from taxation if you have lived in your home for the past five years. But the way the government is spending money, that exclusion cannot last.
But, but, but… Your home isn’t worth what it was in December of 2005. That’s true, but it doesn’t change anything. The home that you can buy now was also selling for more four years ago.
Here’s the way things really shake out: If you have equity in your home, you can take that equity as a tax-free profit — for now. At the same time, you can snag the $6,500 tax credit. And you can do all of this at historic low interest rates.
If your house is worth $400,000 and you only paid $300,000 for it, you could reap a gain of $100,000 — which would save you thousands of dollars in taxes. If you wait for prices to go higher, you may wait a long time for a much smaller return. And the house you buy then will have appreciated, also.
I think we’re looking at a perfect storm for homeowners with equity: You can move now, take a tax-free gain, get a lot more house than you could have bought a few years ago, all financed with a low-interest mortgage. And then, next April, Uncle Sam will write you a big fat check for your trouble.
On second thought, this is less cash-for-clunkers than the taxpayer’s revenge…
Sell this idea! Feel free to share this idea with your clients and prospects — in your blog, by email, on the phone. This is big, and the more we talk about it, the bigger it will get. Yes, it’s insane, but for once the hardworking American people will be on the sunny side of insanity.
Eric Hempler says:
I can only imagine countless people thinking of a way to take advantage of this. Maybe another four year old.
November 12, 2009 — 9:21 am
Greg Swann says:
> I can only imagine countless people thinking of a way to take advantage of this.
Possibly. But this has the potential to starve the beast by taking billions of dollars in future tax receipts off the table.
November 12, 2009 — 9:34 am
Barry Lynn Miller says:
I can understand the reasons behind your post- Yeah lets push the tax credit and get some property sold and if someone was on the fence about selling then yes this tax credit is a good idea and an extra incentive. However I get the impression that you’re trying to pull people who were not currently in the market (or on the fence) to sell and I’m not sure that is a good recommendation that’s my opinion and everyone has one. In my market we are steadily moving back up so 2 years ago home work 200,000 say and in dropped to say a 160,000 value but know its moving back up and we are at say 175,000 the way our particular market is moving that house in a year or so could be back at say 190,000 I find it hard to recommend selling for a $6500 tax credit when the market will turn around. Another problem I have with tax credit is when people start calculating the credit in there bottom line there by forcing our prices down farther. Say someone has property listed for 110,000 and his bottom line is $100,000 because of a payoff. Some savvy Agents will justify to that seller “Hey you do get your tax Credit” and they accept offer of $93,500 if to many people do this it will drive the market down worse than before. Some agents are starving to death and will pull all kinds of tricks. I DO NOT LIKE THIS TAX CREDIT – I’m ok with FTHB but this latest version I feel will hurt more than help- That’s just my opinion
November 12, 2009 — 9:40 am
Greg Swann says:
> Yeah lets push the tax credit and get some property sold
Not my objective. That will be a nice secondary consequence. But it seems obvious to me that the capital gains exclusion will not survive next year’s budget. This may be the last chance homeowners have to reap the full benefit of the appreciation they have realized on their home. A sane government would not impose taxes, and a saner crazy government would tax everything equally so as not to distort markets. Our government is stark, staring mad, but giving them billions more in tax dollars will not make them less crazy. If you love your house and don’t want to move, don’t. But if you want to maximize the financial benefits of homeownership, this may be you last best chance for a while.
Note for inlookers: What matters is the confluence of three cherries on the slot machine: The tax credit, low interest rates and the capital gains exclusion — with the latter being worth the most money in most cases, and with the exclusion almost certainly being doomed going forward.
November 12, 2009 — 10:10 am
Mark Brian says:
Excellent point about the potential changes in the capital gains tax. So many people will be sorry once this is changed and they did not take advantage of the low interest rates.
November 12, 2009 — 11:56 am
Dave Blobaum says:
Thanks Greg for making your case very succinctly. I have been preaching to my clients that it is an excellent time to trade up for the past year. With the new tax credit for current owners, it only strengthens what was already a very strong argument for trading up. Good point on the future of the Capital Gains exemption as well.
November 12, 2009 — 1:03 pm
Al Lorenz says:
Do you think they’ll really drop the capital gains exclusion and let the stimulus run out next year with a housing market that will still be weak? The Home Buyers’ tax credit so far has only stimulated the low end of the market. The new, faster, shinier tax credit should move things up market a bit!
I do agree that there’s no telling what will happen with federal budgets and taxes next year, but my gut doesn’t tell me they would drop both the gains exemption and the buyers’ tax credit next year. But, I don’t have any basis for that other than trying to make sense of things that can’t be made sense of.
November 12, 2009 — 2:18 pm
Greg Swann says:
> Do you think they’ll really drop the capital gains exclusion and let the stimulus run out next year with a housing market that will still be weak?
Don’t know. Do you agree that someday they will have to eat the exclusion to pay for this on-going orgy of cannibalism? If you do, what will be interest rates be like when that happens? It’s the three together — the tax-credit, low rates and the exclusion — along with very low prices — that makes this the magic moment. Events will play out as they do, but I find it hard to imagine that things will be better for homeowners any time soon than they are right now .
November 12, 2009 — 2:40 pm
Greg Swann says:
Incidentally, talk to your parents about this. In late 2005 we thought about talking to seniors about cashing out and moving into 55+ communities — where the boom really didn’t happen. We didn’t do it then, and I’ve regretted it ever since. This is another golden opportunity like that, a good chance for seniors to cash out and downsize, retaining as much as possible of their liquid wealth.
November 12, 2009 — 2:43 pm
Al Lorenz says:
Greg,
I get it and agree I don’t see the picture getting any rosier than now for folks with equity. Thanks.
November 13, 2009 — 10:25 am
Jeremy says:
I have mixed feeling about the ‘move up’ credit, but I do believe it will get some folks thinging about making a move that otherwise wouldn’t. I don’t believe that the $6500 by itself will be enough, but if inflation begins to rear it’s ugly head before April and the rates start to creep we just might see some action from it. I think it will also depend on the market- In our market the median sales price is around $270k so $6500 might not be as substantial as it might be in some areas where the median price is closer to $100k.
November 13, 2009 — 2:37 pm
Thomas Johnson says:
The way I look at it is that a move up seller can have my listing commission subsidized by the beast, if the sales price is $216,667 or lower, REALTOR selling costs are covered by our uncle. What’s not to love?
November 14, 2009 — 10:31 am