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Comment by opportune | Hacker News Reader

Capital gains is only applicable when you sell the house and it's not your primary residence, or if you made a ton of money on it. And it's only a tax on the appreciation of the house, not its market value.

Real estate agent fees are only applicable on x% of the value of the house you sell.

Higher property taxes do stink but are not applicable after you sell the house.

I'm not sure why you can't afford to move. Have you talked to a tax specialist or a financial advisor? If you bought a house at X and sold it at 2x, even if you haven't paid any of the principal of your mortgage(if you have one), you would likely pay a maximum of ~25% of X between capital gains (if you own multiple homes) and real estate agent fees. So you still made 75% of X from appreciation. I don't really understand what you think your problem is.

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Suppose I bought my house for $1M and prices are stable. I can sell my $1M house and buy a different $1M house and the net cost to me is 6% agent fees.

But if prices have doubled now the net cost to me is much higher. The agent fees are double what they were, and I have to pay cap gains on $500k. All that is money I have to come up with somehow in order to complete the transaction. I either have to write a check, or take on more debt. The higher prices go, the more expensive a lateral move becomes.

Yes, I have more home equity if prices go up, but that only helps me if I cash out and move out of the area.

Not understanding your complaint. You would have to sell your house for more than $1.5M to have any taxable capital gains. You would have to sell your house for more than $2.5m to have an effective tax rate of more than 10% on the sale. (For example, if you sold your house for $2m, your effective tax rate on the sale would be 5%, ignoring AMT and assuming no other significant sources of income.) Boo hoo.

On the second point: the only cash you need to come up with is the down payment for the new house, which you would get out of the proceeds from selling your old house. If you sold your house for 2x the purchase price, you have more than enough cash to pay the down payment. Boo hoo.

Complaints like yours are why people outside of the Bay Area really hate Silicon Valley.

> For example, if you sold your house for $2m, your effective tax rate on the sale would be 5%

The tax on capital gains in this case would be 20% federal, ~10% state (in California), 3.8% ACA investment tax. That's an ~34% rate, not the 20% you seem to think applies.

> the only cash you need to come up with is the down payment for the new house

Let's take the simple case where the old house was paid off, no mortgage. Are you suggesting that it's unreasonable to want to downsize and still not have a mortgage?

If you do have a significant mortgage, and are hence highly leveraged, an increase in property prices is pretty good. If your mortgage is more or less paid off, you can in fact end up in a situation where you can't buy any house at all in the same general market after selling your existing one and paying the property taxes. See a worked-out example at https://news.ycombinator.com/item?id=15706565

The 3.8% net investment income tax doesn't apply to real property, it applies to investment property. The NIIT specifically excludes gains from the sale of primary residences. The IRS provides a helpful FAQ on this: https://www.irs.gov/newsroom/net-investment-income-tax-faqs.

Second, the 25% rate is an approximate rate that combines the federal and state rates while taking into account the deduction for state and local taxes. 25% is a nice round number. I'm not going to prepare a detailed tax model for an anonymous internet comment.

My point stands either way: he's whining about having to pay an effective tax rate of 10-15% on his profits from selling his million dollar house while people in other parts of the country are struggling to even afford rent. He's acting like an entitled child and quivering about the exact tax rate he pays doesn't change that.

> The 3.8% net investment income tax doesn't apply to real property

Ah, I didn't realize that, thank you!

> he's whining about having to pay an effective tax rate of 10-15% on his profits

No, the key part of the complaint is that the combination of price rise and tax structure mean that a lateral move requires liquidity he does not have.

It's a first-world problem for sure, but it's still a problem caused by the fact that we have various fairly dumb tax policies.

It only becomes remotely intelligible if you include these extra constraints:

- Assume all other houses in the area also appreciated the same amount as the poster's house (say 2x).

- Assume the poster will only consider a move within the same area.

Now if they want to make a "lateral" move, they are looking at $2m houses, not $1m houses, since all other houses they would consider - local to their area - also increased in value.

I feel like they should just get a $1m house (yes, a "downgrade") if that's the case and have fun with their near-$1m profits, but what do I know.

I don't think there are $1m houses in their area. My guess is that the value of a $2m house in that area is land $1.5m, structure $500k. Even if they downsize the house cost by half, and buy in a smaller lot, the minimum house cost is still $1.5m.

I think the one element that the OP is missing is that after the transaction, he is better off by about $130k in tax due to the increase in basis of his home. If he eventually sells and doesn't buy another home in that area, he will realize an additional $130k in profits on the second home that would be lost to tax if he had not sold the first house.

Aren't agent fees and capital gains only applicable after the sale of the house?

I think I'm beginning to see your problem, which is that a lateral move is expensive. But the lateral move is only more relative to your initial buying price. A lateral move (in terms of value of your house and in the same area) would in your example cost about ~$135,000. I see why that would cause a liquidity problem but your actual equity is still higher than before.

You can actually get screwed more by going from X to 4X than by going from X to 2X _if_ you want to buy your new house in the same market.

In the simplest case, consider that you want to move to a house of the same value (e.g. closer to work). That's a lot easier to do if there was no taxable appreciation in value than if there was.

But even when downsizing you could run into problems; see the example I give elsewhere in this thread: https://news.ycombinator.com/item?id=15706565

You're right on 2/3 of those things.

Capital gains is never a "cost" to them, they are by definition only going to be taxed on their gains.

Real estate agent fees, like you said, are based off of the sell value, so unless their commission starts approaching 50% of the value of the house on a 2x gain...they make money. And if their mega-agent charges them 50% of the value of the house, then at least there are no longer any gains to be taxed on :)

The property taxes, however, make sense. Some places lock you in to a certain rate at the purchase price, and they said they bought very low. The argument is that they would be paying more in property taxes for a cheaper house, because they would no longer be locked in to their favorable current rate, which is entire likely given their circumstance.

You're right, I thought the parent was complaining about higher property taxes, not that property taxes would increase if they were to move to a similarly valued house.

That does disincentivize moving into an equally valued house, but moving into that house would have the parent paying about ~2% of X each year in property taxes as opposed to ~1% of X. The appreciation of the house still covers the increase in property taxes for the next 75 years.

Thank you -- this post did not add up to me either.

Do a FSBO if you're that worried about brokerage fees.

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