Moving Up in a Down Market

Many Santa Barbara homeowners that want to upgrade their present home are putting a move on hold because of the soft housing market.  However, the current “buyer’s market” is actually the best time to trade your current home for a better one. Here’s why:

It’s all Relative:

Many homeowners are disappointed that they can’t sell their home for as much as their neighbors did a few years ago.  But this disappointment shouldn’t stop them from making a move because while their current house may not sell at what it would have at the peak in the market, neither will their new house.  In fact, those buying a more expensive home will actually come out ahead.  Take for example a family who owns a house that was worth $1 million, but now is worth only $900,000 (down 10%).  They can now purchase a home that was worth $1.5 million for only $1,350,000 (also down 10%).  In this case, the family is $50,000 ahead because of the decline in the market.

More to Choose From:

The current real estate market offers buyers more housing options than the past frenzied seller’s market when multiple offers were commonplace and there was a very limited inventory of homes for sale.  While past markets may have made it easier to sell your present home, it made it very challenging to find a suitable replacement property.  As real estate is a long term investment, having more homes to choose from makes it easier to find the right house instead of settling for a house that is not a perfect match.

Lower Property Taxes:

Because property taxes in California are based on the price the owner paid for the property, spending less on your replacement property will save you money for years to come.  Take for example the family buying now for $1,350,000 instead of $1.5 million. This family will save over $1,350 a year for as long as they own the home.

Some Might Save on Other Taxes:

Previous tax laws gave homeowners the ability to defer capital gains taxes realized on the sale of their home by purchasing a new home of equal or greater value.  Those tax laws were repealed and replaced with the $500,000(married)/$250,000(single) capital gains exclusion.  Because housing prices have almost quadrupled over the last 10 years in Santa Barbara, many homeowners will be forced to pay capital gains taxes when they sell their home.  Back to the example of the house that was worth $1 million that is now selling for $900,000.  If the married couple that owns this property has a basis of $400,000, they would not have to pay any capital gains taxes by selling today (because their $500,000 gain is excluded).  However, if they sold at $1 million, $100,000 of their “profit” would be subject to state and federal taxes.  This could be an additional $25,000 (approximate) savings for this family.

If you can get over the psychological hurdle of selling your present home for less than it would have sold in the peak of the market, now may be the most financially prudent time to move up.