You Can Afford It

When average, middle-class houses in our town began selling for a cool $1 million, we thought insanity had gripped the real-estate market. The insanity has doubled.

The 4-bedroom 1,950 square-foot house (pictured) was listed for $1.7 million and sold for $2.16 million.

It doesn't happen often, but we've seen Peninsula home prices fall at least twice over the past 40 years.

When a market is this heated, it's possible we've reached a market blowoff, soon to be followed by a fall.

Tax Commentary:
Those of us who have lived in our homes for more than 20 years are sitting on capital gains larger than the $250,000/$500,000 sale-of-home income tax exclusion. (Yes, few feel sorry for people with these problems.)

While it's generally sound policy to ignore the effect of income taxes in sell decisions, taxes in this case are large enough to keep some older homes off the market. For example, if married taxpayers have an after-exclusion gain of $1.5 million on the sale of their home, Federal and California income taxes could be about $400,000, adjusted by what else is going on in their returns.

It would be much better for tax-planning purposes to leave the older home in the estate and have it stepped up to fair market value after the taxpayers' death. (Under current law there will be no estate-tax consequence if the couple dies with less than $23.6 million of assets. I'm leaving out complexity--see your tax lawyer!). The beneficiaries, i.e., children, grandchildren, etc. can then sell the house with little or no income taxes due.

There are financial structures (reverse mortgages, installment sales, leases) that allow the homeowners to receive cash and pay the income tax on their homes during their lifetime. There are costs and risks associated with these maneuvers, however. As I said above, see your tax lawyer! You can afford it.