That’s true, of course, but unlike death, taxes are rarely fatal.
In fact, taxes can be a sign of good fortune.
Many years ago, I had a conversation with an aunt who was furious about a tax bill. While settling my uncle’s estate, she found she owed an additional tax that in today’s dollars would be almost $200,000. She was irate, but my only thought at that point – I was in my 20s – was that I wished I had enough money to be taxed at that level.
She went on to live in luxurious circumstances in a beachfront condo for the rest of her days, so I don’t think the tax bill cramped her style. But her anger certainly spoiled the mood that afternoon. And it offered a life lesson for her nephew.
So, what does this have to do with residential real estate?
Given the huge runup in real estate values over the past decade, a great many homeowners are sitting on a big pile of equity. I’ve heard lots of people gripe bitterly about paying tax on capital gains if they sell. And, I’ve actually heard people talk about not selling – simply because they didn’t want to pay the tax.
Well, if you find yourself holding a huge amount of equity in a piece of property, there are a couple of ways to approach this “problem”.
First and foremost: celebrate your good fortune! You bought low and now can sell high! Isn’t that the point? Sell if you want to, pay the tax, and enjoy the remainder. You haven’t lost anything. You’ve made a bundle.
Kick the tax can down the road. If you can and want to, hold the property until you die (that is going to happen regardless of your tax status) and let your heirs handle it. If your will is in proper order, they likely won’t be taxed much, if at all, when they sell after your demise.
Take action with a 1031 exchange. If you cannot or don’t want to stay where you are, sell and buy something else using a 1031 exchange. A 1031 will postpone (not eliminate) the tax liability. There are very specific rules that must be followed, so you will need expert counsel. But if done correctly, a 1031 will allow you to buy something new and can kick the tax can down the road, as above.
In any case, always remember that you are being taxed on a gain – not a loss! You’ve come out ahead. Rejoice in your good fortune, and don’t be like my aunt.
Your glass is more than half full!