Real estate appears to be in the middle of a crazy sellers market. Inventory is low and most anything that is placed on the market is snapped up almost immediately by desperate buyers – sometimes sight unseen.
Much of this comes as many buyers migrate from colder, more expensive and restrictive northern and western states to warmer, less costly locations in the south. However, this is not the whole story as the pandemic induced practice of working from home reduces the need for proximity to urban environs. Then there are the usual reasons for moving like new job, downsizing and retirement. Whatever the individual reasons, buyers significantly outnumber sellers with the predictable upward pressure on the prices.
For instance, a simple cape cod – nice, but nothing for HGTV – that was located across the street from my son's home, was listed at a substantial increase in price over comparable sales. He says the street was lined with cars when the house hit the market. The eventual buyer, after just a few days paid twenty thousand over the asking price. Then, when the inspection revealed mold in the basement, they just took the house as-is and paid for the remediation without going back to renegotiate with the seller.
An associate of mine had a nice two bedroom condo they wanted to sell, but were not in a hurry. They priced it high to give them time to get ready to move, etc. It was gone in three days.
Is it time for YOU to sell?
Given that it would probably not be difficult for you to sell your property, unless something is dreadfully wrong with it like being adjacent to a landfill or politicians office, is selling now the best decision for you? It depends on your circumstances and what you plan to do with the windfall.
If you've been in the place for a while and have some equity AND are heading to a less costly location, this choice could be a winner for you. That is moving from the city to the suburbs or from the high tax north to a more southern location, could go well for you. If you are looking at going the other way, from the suburbs to the city – unless it is somewhere like New York City where some prices have taken a beating as many people have fled the area – it may not go as well.
If you've had your eye on the five bedroom center hall colonial or the nearby waterfront home a few miles down the road and you see your house has increased significantly in value, don't get too excited since, although your house is now worth what those homes were selling for – they have gone up as well. So, when you sell your house for a pile of money, that pile of money will buy you pretty much what you had if it is in the same market.
On the other hand, if you are not needing the money to buy another home or it is an investment property, that is an entirely different situation. It may be time to take the money while prices are high and run – just consider carefully what you would do with the cash.
If you are looking a selling investment properties, there are a few factors to consider. Will the cash from selling a property that is producing a steady income replace that income? This may not be a factor if you are cashing out and retiring to a tropical island, or even a nice Florida beach.
If you have significant equity, the cash from one property may provide the down payment for several more properties and increase your cash flow... or it may provide the capital to take advantage of the outrageous retail prices and allow you to rehab and flip some currently undesirable homes.
There is a lot to consider beyond just the inflated selling prices. If you don't think prices will remain this high, just like many stock market investors do, moving into a good cash position may well permit to buy more with your money as a potential bubble bursts and prices fall. This whole process would be so much simpler if only we had a crystal ball to see the future.
The Taxman Cometh
No discussion of the potential for greater profits would be complete without recognizing that your greedy uncle in Washington is looking at more and better ways of increasing his share of your income. Books have been written on the subject so what we have here is, at best, a brief overview of some of the things to keep in mind. Whatever is written here could change tomorrow, so it would be well to pay attention to events in DC and keep in touch with your accountant and tax advisor.
If this is your personal residence, you get somewhat of a break. As a single tax payer, $250,000 of the profit is sheltered from the taxman. That is profit, not selling price. As a married taxpayer, each of you is eligible for that amount, or $500,000 profit is yours before they look for tax payments. Unless you are in the realm of point houses (as in 2.4 million), you should have little problem here.
Investment properties are another story entirely. Currently long term capital gains are taxed at a lower rate than regular income. Word out of Washington is that some are salivating over the potential windfall they would get from more than doubling their share of your profit. All this in view of the fact that a considerable portion of the price increase is because of inflation and not increase in intrinsic value.
Is There A Defense?
There are some things you can do to soften the bite of the taxman. Here is where a good tax advisor or account can be a valuable addition to your team. Just be sure that he or she is on the up and up and stays on the straight and narrow as the IRS can do nasty things to you if they think you are chiselling rather than filing.
While books have been written on tax strategies, we will look at a few. First thing that comes to mind is that you receive payments over several years as this will show a lower profit each year than if you recognized the whole amount in one year. This generally lowers your tax bill as it can keep you in a lower bracket.
If you hang around real estate investors for long, you will become aware of a number of creative ways to purchase property... and they are legal as I don't know any of these people that would look good in an orange jump suit. We don't have room to go into detail here, but options can be useful in spreading income over a few years. Partial ownership and lease options are other paths to explore. You can work with 1031 exchanges. Although both properties would be valued at the inflated prices you would still get the tax saving benefits of the arrangement.
As the saying goes: It's not what you make, it's what you get to keep that matters. If it is right for you, sell and take your profit, but be careful so you get to keep as much as possible.