Your Capital Gains may NOT be Taxed; Ask Me How!

A client recently asked when he and his wife should use his one time $125,000 over age 55 capital gains tax protection; they were approaching their mid 50s. To his surprise, I told him since 1996, you can keep the first $500,000 in real property “lottery winnings” when you sell your home, and do this every two years I googled and found that you can get 1990 (older) articles still talking about this outdated information on capital gains!

We talk about the laws, but what exactly are capital gains…? It’s about gaining capital, right? Not exactly… Simply put, “capital gain” refers to the profit you gained after selling your property (or investments, stocks, etc.).  There are varying tax brackets depending on income level and whether it was short-term or long-term, and in the case of selling your personal residence that little percentage change can make quite a difference (this is also why knowing your tax basis on your home is important when you are trying to sell!).

Regarding your home:

That “one time” rule of capital gains is long gone, yet often people hear it from a friend of their neighbor’s third sister, who’s married and read some where….  you get the drift.  Ask a professional, or call with questions! Buying and selling real estate are epic, life changing events and should be done with ALL the pertinent information.  Acting now or doing absolutely nothing both could be the right answer at this time in your life, but how do you know which it is?

The “new” tax law can be found here on the IRS website, but simply put:
“If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.”  ~Publication 523 Cat. No. 15044W of the Internal Revenue Service (IRS)

Here’s an example:
The Smiths bought 123 4th street for $300,000 in 2011; today it is worth $700,000. That equals $400,000 in capital gains. Married, they get to exclude up to $500K (of the $400K), meaning they had no capital gain tax!  Single, Mr. Smith would exclude the first $250K, meaning he had $150K left waiting to be taxed.

However, you can also factor in selling costs, buying costs, and improvements to cut the capital gains taxes. Your tax basis or basis to compute the tax goes up (a positive thing!) with improvements like a home addition, pool, etc; basic maintenance isn’t necessarily usable. The costs of selling, like title, broker fees, and escrow, reduces the sales price. Together you get a number that you must report the next tax year. If the “gain” is less than 250/500K, dependent on single or married, you pay ZERO cap gains tax on the sale.

Of the eligibility rules, there is an “ownership requirement” that states that the home being sold had to be your primary residence for two of the last 5 years.  And it need not be continuous, but cumulative. Eligibility rules can be found in more detail starting on page three of the IRS document mentioned above.

Why should you care? If the Smiths hadn’t had a capital gains exemption, they could have been paying tens to hundreds of thousands of dollars on the federal and/or state level (depends on your income tax bracket).  Buying and selling a home is best done with a level head and all the facts.  We topped out in values in 2007-8; then the so-called mortgage meltdown.  Short sales, losing homes, misery AND opportunity.  Come 2011 or so, we hit home values bottom here in Southern California.  Since then, the last 7 years has seen the rebound in values.  Many homes purchased since 2005 are worth more, from $1 to hundreds of thousands.  Doing nothing IS a decision… so is planning ahead.

Is it time to sell? If it is, note that a dollar in a bank called “bank” or a bank called “home equity” have equal paper value until you do something; of course, the bank dollar is more liquid but inflation is eating away at it.

The bank dollar gathers a couple per cent interest (rates are rising, but savings rates do go up like mortgage rates), a good thing and savings for another day; the equity dollar, in fact up to $500,000 (adjusted up and down by improvements and costs of sale & purchase) of them, can be converted to gold, silver or ?? upon sale with NO tax exposure.  And it may be time to sell; demand has softened, but values are still up.

I am not a real estate attorney or CPA, so I do recommend your tax guy gets your call for details.  He or she knows your particulars, but this factor can mean turning your equity gold into a new home, trade up or go smaller, keeping or using some equity free of taxes for other purposes, increasing or changing your asset picture, etc.

I STILL make house calls.

Len Beckman

Broker/Owner of M3RealEstate



Quick Tips on Trusts, Probate, and Living Wills

Everyone older than 18 should have a trust.   Aretha Franklin, what a voice…but she died, sadly, intestate, a fancy word for no will or trust. When this happens, the state is forced to make decisions for you.  And, as the sample Living Will (below) proves, we don’t always understand what these legal terms mean.

There is no doubt in this real estate dad of 11’s mind, it is important.  You don’t want arbitrary bureaucrats, even if they might mean well, trying to read your mind beyond this world. 

For example, ‘My Living Will’ shows creative ideas & strict interpretation of the law and familial needs, but I don’t think the little B’s really were born outside of wedlock.  They just interpreted mom’s comments literally but differently than she meant.

Put simply, if you don’t take care of your affairs, property and intentions, your “will”, guess what: the state happily will.

Your desires and intentions must be written;  This is where a living trust comes in. Take the verbal “Living Will” pictured above; it’s more than a little humor.  Her wishes were real but misinterpreted. With legal advice, she’d better understand HIPPA and other issues.

A trust is a contract to specify your wishes for your assets andyour heirs.  Life Insurance IS a kind of trust between you (trustor), your insurance company (trustee), and your beneficiaries, where the beneficiaries are paid without probate, since your wishes are legally specified.  Often the insurance policies are included in the trust listing of assets for convenience, but it is a contract that stands on its own as well.

Mom expressed her health wishes regarding the vegetative state that can happen; the kids took swift action to separate mom from wine and facebook.  So, if your will is not “contractually” housed inside a trust, as well as your bank accounts and real property, etc., a judge, who works hard to do it right, will decide usually with the aid of a good or not so good estate/trust attorney, a.k.a. probate. The judge works hard to do it right, 

In simple terms, probate is the state deciding for you; a trust is you deciding for you. The “little bastards” sired by Mr. and Mrs. B demonstrated a miniature probate by deciding her future based on imperfect interpretation of her audibles, her spoken will.  A trust is a contract with specific beneficiaries; probate is a dart board with people outside the family making decisions for you.  Of course, the state is not soulless, and there are rules of succession when it comes to probate. Who will be appointed to personally represent you (legal term is personal representative), however, could be a turkey shoot; next in line just may be Scofflaw, Jr. who frequents the casinos more than a Vegas janitor at the Golden Horseshoe.

If you have lots of kids, you can do trusts within a trust to guide future events; use wisdom not expediency.

I have been doing real estate since ’88, and part of my practice has been at the courthouse selling properties for court appointed receivers, judges and trust attorneys.

Example: partition hearings where owners disagree about selling, such as the property from three siblings, brother & sisters that co-owned but memories of who did what have oddly changed.  Or a large $100 million MediCal fraud case with 77 victims and property needing to be sold to satisfy restitution required by the excellent judge. Among others. The tragic and the triumph stories side by side all indicate you must make your wishes known.  

Sure, you can go online to get forms, but that online form won’t represent your heirs or you in court when a major defect in the legal is discovered.  Or it lacks sufficiency in really recording your wishes. And, you don’t need to own $10.98 million in GROSS wealth for this to be important; smaller “estates” need protection because probate fees are legislated and not cheap.

Recall Aretha Franklin’s four sons now must battle it out, since there was no trust. Not even a will. But, no, the probate judge must decide on the best information available. Her life work is up for years of court battles, unless the judge assigns an honorable person. Rumor has it, her longtime attorney often recommended a trust but she never did it.  News flash:  ALL of us will die someday and there aren’t  UHaul trailer hitches on hearses.

Best way is to hire a good estate/trust attorney to do it right.  It’ll cost you more than a $2 independence bill but not a million. My conclusion is a simple one: get with a good trust/estate attorney for a living trust; codify your wishes for your offspring and what you have acquired should be your own.  Concerned you will resemble the Matrix, held together by wires and tubes?  Then you need a knowledgeable honest trust atty who understands medical laws AND your wishes regarding DNR (do not resuscitate) or other medical needs.  BOTH are important. Otherwise, probate and/or conservatorship (if you CAN’T physically make your own decisions) could result.

If you don’t put your wishes in writing with a good trust attorney (we can give you the names of some): then  you don’t control much of anything. 

People, start your engines and get your trust going.

Len Beckman
Broker/Owner of M3RealEstate

The Allgeyer Clark Vintage Home – 1513 South Brookhurst Fullerton

There’s this 100+ year old, beautifully restored, vintage home just north of the 91 freeway on Brookhurst Street.   It sits in a gated mini-estate surrounded by wrought iron and a powered gate.  

You could call it a 50/50 estate: the main home was moved over 50 years ago, in one piece, from the Allgeyer citrus orchard at Brookhurst and La Palma where it joined the original ranch house.  It’s old address (10011 La Palma) no longer exists when you search Anaheim’s building records! This one piece transport tidbit is critical, since it was moved sometime before the 91 freeway was opened between Magnolia and Harbor circa 1956-1958.  Definitely hard to move a 2 story building under that Brookhurst overpass…

m3 brook frontroom alt viewHow many memories could these walls reveal? One is of a Fullerton pioneer who changed this county with aerospace and industry (achievements including bringing $30 million in new industry to the area, examples being Hughes Aircraft and Kimberly Clark) giving this vintage estate a link to the history and growth of our beautiful Orange County and . 

And the long time owners, Robert Louis Clark and Helen Allgeyer, are a story worth telling with their grandfather, Charles Allgeyer. If you are interested, here is the original blog with more of their life story

m3 brook gate pillars

104 years later, it is a remarkable vintage property.  Much of the restoration preceded the current owners, meticulously carried out by the Brass family (owners from 1975-2001), we believe.  This estate is well worth a tour!  Currently listed by us here at Millennium 3 Real Estate for $949,000, it is quite a bargain knowing its history and the potential to accrue rental income from the old ranch house.  Don’t miss out!

Call Len Beckman at (714) 267 1413 for a personal tour.

Thank you for viewing!

Here’s another link to the original blog: