Waiting to Sell for More may Cost you a Bundle!

Many people ask me if they should sell their home now, or wait a few months or a few years for the market to recover. During uncertain times, people tend to adopt a “let’s wait and see” approach – after all, it’s human nature. Unfortunately, this instinct doesn’t serve most homeowners, who should really be asking themselves the more difficult question: What will I NET if I sell my house now versus later?
The answer to this question is not simple. It requires an analysis of your holding costs, lost opportunity costs, sale costs, and, importantly, the tax you will pay on any profit that is earned from the sale of your home. This last piece, TAXES, is critical since most experts agree that the long term capital gains tax rate will likely be increased by Congress in the not-too-distant future.

Today, most gain on the sale of real estate is taxed at a historically low rate of 15 percent. When Bill Clinton was in office, the capital gains tax rate was as high as 28 percent. A future tax rate increase of this magnitude could have a huge impact on your bottom line if you have a significant equity position in your home.

Let’s say you bought a nice property in 1998 for $800,000. That property is probably worth about $2 million today. Assuming you made no capital improvements to the property, you are looking at about $950,000 in taxable “gain” once you exclude the first $250,000 of profit ($500,000 exclusion for married couples).

At today’s capital gains tax rate, only $142,500 of your remaining profit will go to Uncle Sam. If you wait to sell your property, however, and the tax rate is increased to 28%, Uncle Sam could take $266,000 of your profit – almost double the amount! With home prices predicted to trade sideways for many years to come, you could lose as much as 13% of your equity if you wait to sell. Stated another way, home prices will need to go up 13% just for you to break even.

Of course, these numbers are rough generalizations (you should consult with your tax attorney or CPA regarding your specific circumstances to determine the most appropriate course of action), but they serve a point: current home sale prices are only a part of the much large financial picture that you need to consider, especially if the profit on the sale of your home is subject to capital gains tax. Truly, waiting to “sell for more” could cost you a bundle.

If you are one of the many people thinking of selling but are concerned about market timing, I can help. With years of experience as a practicing attorney and real estate broker, I will consult with you to help you find the right answers, or help direct you to tax and estate planning specialists if necessary.