Retirees: Should You Pay Off Your Mortgage? – I’ve never been a big fan of owning expensive property free and clear for a couple of reasons.  It puts a big chunk of your net worth in one asset, which is not as good as diversifying.  Second, being real estate rich and cash poor is not a good spot to be in.  This is especially important with the recent appreciation in real estate values.  Owning a $500,000 home with no mortgage isn’t a wise move if that means that you don’t have the money you need to take trips, buy a nice car and enjoy your last years. 

Thanks to the folks at FairTax.org for this.

Q:

Kerry:

 

Did not help my “new” stock broker’s news that we now have $38,000.+/- in losses in Tech Stocks.  From a Tax strategy, do we now _need_ to dump this and take the losses over the next three years?  Or, offset this with $38,0000.+/- sales of our Bank stock (mostly old Bank of America (BAC)).  Bank of America pays 4% dividend on a $44. per share.  Our BAC cost basis is $24. per share.  I calculate a bit more return than 4% dividend.  To keep or not to keep BAC?

Our new broker recommends we move to more cash thru this offset. Go into Mutual funds.

Kerry, what say you?

A:

Just as with whether or not it’s a good time to sell off real estate, the tax consequences of selling off stocks are completely irrelevant in deciding whether to dump them or not.  That decision should only be based on whether you believe that their value has peaked and is likely to go down, and whether you could put the proceeds into a more lucrative investment.

Assuming that you do come to the conclusion that those tech stocks have no upside potential and are heading downward, selling would be the best move from an investment perspective.  From the tax angle, that will give you $38,000 of capital losses that can be used to offset up to that much of capital gains. 

Again, you shouldn’t sell off appreciated assets just to recognize the gains, unless those assets meet the same criteria of heading downward.

If you don’t have enough capital gains this year to offset the full $38,000 of losses, you can claim $3,000 of losses above the gains, and carry the unused losses over to your next year’s tax return, and so on.

While it wouldn’t make any sense to do this in your case, there are some people who try to intentionally recognize capital losses by selling off deflated stocks and then repurchasing them.  IRS has a weapon against this kind of manipulation called the Wash Sale Rule.  Under this rule, if the same stocks are repurchased within 30 days after their sale, no capital loss from the sale may be claimed on your tax return.  The loss would have to be added to the cost basis of the replacement stock.     Again, this shouldn’t apply to your case because, if the stocks are already so terrible that selling is the wisest move, there would be no reason to repurchase them.    

I hope this covers the points you were after.

Kerry

 

Q:

Kerry, I have a capital gains tax question that I need answered. My wife and I are thinking about selling our new home I say new home because we have only lived in it for 3 months now. If I sold it tomorrow I would make about $96,000 In my pocket (after selling fees). We want to sell our home because my wife physically cannot handle her job anymore and I cannot solely handle the bills we have. She has been plagued by health conditions last year alone she had 4 separate surgery’s we thought it was all over after her hysterectemy last September. We thought she would be ok to return back to work. After her surgery and 6 week healing time we figured she was ready to go back to work and she felt great so we sold our current home and 6 months later moved into our current home. Now she is feeling more pain the Dr’s think it is kidney related now she can barely cope with being a mother to our 2 children let alone her 30 hour a week job. Now we want to sell our home and pay off our 2 vehicle payments and some other debt. Unfortunately since home prices have been skyrocketing here in AZ we would not be able to find a cheaper house payment. I have been doing tons of reading under the IRS website on unforeseen circumstances related to “A change in employment that leaves the taxpayer unable to pay the mortgage or basic living expenses”. I guess my question is what is considered basic living expenses? Is paying off all my debt so my wife does not have to work qualify for this? It says transportation expenses. Either way I will most likely sell my home but if I can avoid the 20k capital gain tax that would make things a lot easier on us.

I would rather know up front and pay the taxes so a few years down the road I do not get surprised by a piece of mail saying I owe x amount of dollars to IRS. Can I avoid part or all of the capital gain tax?

Thank You

A:

From your description, it sounds as if you would qualify for the pro-rated tax free exclusion based on the health issue.   Selling in order to pay off debt wouldn’t make as much sense as a rationale for the pro-rated exclusion as would the health and employment reasons.

As I described on my website, the prorated tax free exclusion works out to about $684.93 per day for a married couple.  Assuming your estimate of a net gain of $96,000 is accurate, you would need to live in the home for at least 140 days in order to have all of your profit exempt from tax.  If you move out and sell sooner than that, part of your profit will be subject to ordinary income tax rates since you will have owned the house for well less than the 12 months required for lower long term capital gains rates.

I hope this helps. You should obviously work out the figures in more detail with a tax pro.  My guess is that your calculation of the $96,000 gain may be seriously off, as most people don’t understand how to properly figure their true cost basis.

Good luck.

Kerry Kerstetter

Follow-Up Q:

Wow thanks for the quick response. Basically I should select had to move for health reasons? What kind of proof would I need to provide in the event I would be audited. Also how likely would it be for me to be audited?

Thanks again

A:

Again, your should really be working with your personal tax advisor to better take into account your unique circumstances.

However, if your wife’s medical condition is as bad as you described, the health reason seems perfectly appropriate.  While it’s not required, my philosophy with unusual circumstances is to attach a lot of explanation and documentation of the issues to the original tax return so that IRS screeners can see it up front and not waste their (and your) time calling you in for an audit.  His is the main reason that I have steadfastly refused to electronically file any tax returns.  There is no ability to attach additional info to e-filed returns.

In regard to what should be attached, I would include a narrative description, such as in your earlier email to me, plus some doctor’s statements.  That should be more than enough to convince IRS that your wife’s health is bad enough to warrant moving out of that home so soon after you moved in.

Good luck.

Kerry Kerstetter

 

As strong a supporter as I am in real estate as the best type of investment, I am well aware of the fact that people can get carried away in feeding frenzies, such as we are seeing in parts of the country right now. It can stop abruptly; so be careful.

Thanks to Ben Cunningham for passing along this story about how some folks in Tennessee are reacting to receiving notification of large increases in their property tax assessments.  Specifically, the following quote from one property owner whose assessment went from $70,000 to $200,000:

It was worse than getting an IRS audit. It was like getting a heart attack in the mail.

I’m guessing this woman hasn’t actually been through an IRS audit.

Rarer than certain species of woodpeckers are TaxCutters in the halls of power.