Selling my house and keeping the cash - possible?

September 11, 2005 1:22 PM

Selling a house and keeping the cash - my wife and I are in the midst of selling our house. When all is said and done (fees, taxes, etc all paid) we're going to get $250k. The expected thing to do is move to another house and use that money as a down payment. But we're playing around with the idea of taking the money and travelling for six months - can we? More Inside...

Are they simply going to hand us a check for $250k and that's it? Or is it transferred straight into the next real estate transaction to avoid tax implications? If we do just take the cash, will get screwed on taxes? We're in California if that helps at all.

posted by cubedweller to home & garden (20 comments total)

If this house in question has been your primary residence for at least two years, no taxes are owed on the profit. I believe they will just hand you a check and send you on your way. Bon voyage!
posted by spilon at 1:43 PM on September 11, 2005

A good place to start is IRS Publication 523: Selling Your Home which is relevant to you if this is your main non-vacation home and is not a rental property. In short, if you lived in the house for over two years, then it was a house and not an investment. So, the key points when you ascertain tax liability have to do with the base cost of the house, the increase or decrease in value while you had it, and then the amount of "exclusion" you get or claim when you sell it. My reading of this document is that you can exclude up to $500K between you and your wife assuming you meet a handful of conditions [which means no tax liability but I am SO not an accountant]. MSNBC has a more basic explanation of the major points of dealing with capital gains. The IRS document explains all of this passably well with lots of good phone numbers to call at the end.
posted by jessamyn at 1:46 PM on September 11, 2005

I think Suze Orman has an article on this too, but I have to run and can't look it up right now. Poke around her website and you're bound to come across it.
posted by fionab at 1:58 PM on September 11, 2005

Have fun on your trip :). Could be good timing too as you might get "lucky" and have the housing market crash while you're sailing around the world. Then, when you come back, hey, cheap house!
posted by freshgroundpepper at 2:18 PM on September 11, 2005

Ditto spilon. After everything is paid for, you will get a big, fat check. I've been through this recently myself, and walking around with a 6-figure check is unreal.

This is a relatively recent change in the tax code--it used to be you had to be over 55 (?) to avoid capital-gains taxes on the sale of your house. But even then, I think you had one year (?) to buy the new house in order to avoid the tax hit--the tax code did not expect everyone to move directly from house A to house B.

Obviously the smart thing to do would be to take that check, deposit it, and run to an investment manager who will put the money to work for you. And have fun traveling.
posted by adamrice at 3:14 PM on September 11, 2005

The Fool has a pretty good rundown of the issues, including the most important part, the restrictions.
posted by madajb at 3:23 PM on September 11, 2005

Wow, this is pretty exciting - it sounds like we avoid the restrictions and will just walk away with the cash. I have a pretty good job but this appears to be one of those once in a lifetime opportunities (no kids or anything at the moment.) I can't envision myself being able to do this again until I retire.
posted by cubedweller at 3:37 PM on September 11, 2005

There is a lot to be said for taking $50,000 of the money for an extended trip, and then using the rest as a down payment on your next house. If you buy a $300K house, that means that you will only be servicing a $100K mortgage, allowing you to opt for a 12 or 15 year term, make additional principal payments, etc.

If and when you have kids, you will appreciate having had the foresight.
posted by yclipse at 4:32 PM on September 11, 2005

Ahh I wish there $300k houses in this area. We're looking at $700k for 1500sqft. But I think that's the plan, take a small percentage of the money and then put the rest away. Any ideas on where to put the money? CD? Savings? Stock Market?
posted by cubedweller at 5:39 PM on September 11, 2005

Prudent investing should get you at least 7%. You don't want to go too risky, talk to a financial advisor about setting up a trust. This is too important and too much money to take risks with. CD is pretty bad way to keep your money. Most people who use CDs right use it for such things as bonuses and other "small amounts" they don't want to invest long-term but don't want to have it languishing in an a savings account. Savings is probably the worst way you could spend your money.

If you'll be going for long, why not buy a house and rent it out? Factor in variable rising home costs with rent and you should make off nicely. Of course there are all sorts of issues there you'll have to deal with, especially concerning maitenance. If you're near a college and can rent to students under the table that'd be the best way. Renting out to a sophomore will guarentee they'd be out in two years, or if they're not it won't be as bad morally as kicking out a family with kids.
posted by geoff. at 7:47 PM on September 11, 2005

I agree with geoff. Take at least $200k and invest it. Don't do it yourself, though. Have an experienced investment manager do it for you. They can invest it in such a way that it's focused on long-term growth (if you're thinking about your kids) or generating income. $200k in investments can very easily generate enough income that the returns themselves would essentially subsidize the mortgage payments on your next house (if you get a 30 year mortgage and keep your monthly payments relatively low, that is).

As far as investing goes, I use these guys. They're really great. My email is in my profile, if you want more details.
posted by Jon-o at 8:12 PM on September 11, 2005

Good lord, if you spend $50,000 traveling for six months, you're doing something wrong.
posted by borkingchikapa at 10:12 PM on September 11, 2005

Er, by that I meant "There's no way you could ever spend $50,000 traveling for six months unless you're paying someone to do all the work for you."
posted by borkingchikapa at 10:14 PM on September 11, 2005

buy a couple (or at least one) berkshire-hathaway share.
posted by delmoi at 10:53 PM on September 11, 2005

Check it out about 21% average APR since 1965. That's compared to the S&P which gained an average of 10% a year. $100 invested in the S&P in '65 would net about $5k today. $100 invested in BRK.B the same year would be worth $286k.

But, one share costs $83,750. If I had the cash I would try to get one of those shares.
posted by delmoi at 11:00 PM on September 11, 2005

sorry, brk.a, not .b. Actualy I have no idea. BRK.B only costs $2,000 some per share. I'm not sure what the diffrence is.
posted by delmoi at 11:00 PM on September 11, 2005

BRK.B is one-thirtieth of a share of BRK.A. BRK.B does not have voting rights so it is slightly undervalued by comparison to BRK.A, but not by much. They move essentially in lockstep. So whichever fits your budget is the one to buy.

As a bonus, all Berkshire shareholders are entitled to a discount on insurance through GEICO, which they own.

I'd put the money into Berkshire or even an S&P index (though I'd also suggest getting some foreign exposure with something like the VWO, EEM, or EFA exchange-traded funds). Very few investment managers can beat the market, let alone Warren Buffett and companies.
posted by kindall at 11:31 PM on September 11, 2005

something interesting to check out: MOFQX -- it's a mutual fund that builds its holdings based on a series of algorythms that respond to the most intelligent trades made at marketocracy.com. the website is a free community/forum that has a system set up for people to create and manage virtual funds with virtual money, and compare their performance with other members. MOFQX is generated from the best 100 performers on the site, updated monthly. food for thought if you're planning on doing some investing anyway...
posted by jruckman at 1:33 AM on September 12, 2005

Good lord, if you spend $50,000 traveling for six months, you're doing something wrong.

I would say that's doing it right!
posted by poppo at 5:25 AM on September 12, 2005

Past performance is no guarantee of future performance, even when it comes to Berkshire Hathaway, which is in essence a highly managed mutual fund concentrated in two sectors: insurance and U.S. non-technology investments. If you're bullish on tech, bearish on the U.S. vs. overseas investments, and/or think that there's a lot more catastrophe risk in the global economy than is priced into insurance premiums, than you ought to think carefully before investing.
posted by MattD at 6:44 AM on September 12, 2005