Hillary and Avi
REAL ESTATE INVESTING
Ages
45 & 46
Goals
Move from Bay Area to Hawaii and downsize their home to a lovely beachside cottage without paying massive taxes on capital gains.
The Challenge
Hillary and Avi have been homeowners for a long time. After 20 years they are ready for a change. Looking to move means realizing massive capital gains on their home. Luckily for them, we have a strategy to help them move into their dream home while keeping more of their money sheltered from taxes.
They have found the perfect home in the perfect neighborhood. However, they have several 100’s of thousands of capital gains, even after the capital gain exclusion for a primary residence.
On top of that they are worried if they sell their house, it won’t close fast enough to make an offer and a downpayment on this dream home. While they have a sizable brokerage account, they don’t want to sell because that would also leave them with a big tax bill.
Hillary and Avi feel that they are just going to have to pay a giant tax bill one way or another and gamble on the chance that they won’t sell the house fast enough to make an offer on their dream home.
Hillary and Avi were looking for solutions but couldn’t find anything that made financial sense. They reached out to us because they heard that we provide specialized services for real estate situations of all sorts.
The Approach
Step One:
Before we could assist this couple with such a complex transaction, we sat down with them to look over all their financials. We learned quickly that they had a sizable portfolio of equity from their past employers. We also got a better understanding of their tax basis in their primary residence and the amount they wanted to spend on their next home.
Step Two:
We made sure that Hillary and Avi were aware of all the tax rules around selling their home. We also educated them on the variety of options they had including converting the property into a rental, tax loss harvesting, selling down their investment portfolio for the downpayment, and evaluating how much of the cost basis can be adjusted for work done on the home.
Step Three:
To put everything into context we created a comprehensive cash flow analysis for Hillary and Avi. We then ran scenario tests to show them how different decisions impacted their short-term cash flow and their long-term goals. We also put together a proposal to help Avi and Hillary understand how our investment strategy can help them create a bridge loan for the downpayment and use advanced tax loss harvesting techniques to reduce their capital gains tax bill.
Step Four:
Hillary and Avi decided to move forward with our tax loss harvesting strategy. We opened the correct accounts and funded the account with their existing brokerage account investments.
The Results
After we implemented our strategy, Hillary and Avi were able to use their account to borrow the money for the downpayment on their new home.
More Flexibility Less Taxes
They bought their new house in December. In January their house sale closed. They used the proceeds to further fund the brokerage account and our tax loss harvesting strategy.
This covered their downpayment loan and the interest they paid was a fraction of traditional bridge loans.
Throughout the year we used the remaining proceeds and the existing brokerage assets to run a proactive tax loss harvesting campaign. By the time the year was over we were able to get rid of a large portion of the capital gains tax they owed. This saved them thousands in taxes in April of the following year.*
Now they have a new home, were able to be patient with the sale of their old house, and managed to keep more of their proceeds sheltered from taxes.
*This is a hypothetical example based on similar real life client cases. Results may vary and the strategy is not appropriate for every client.
