Selling my house--best way to invest profit

[Miss Sisyphus]

I'm very fortunate that my 100 year-old house has nearly quadrupled in value since I bought it in 1993. I was lucky enough to buy in a neighborhood that went historic and is now in a part of the city that is "hot." A realtor told me houses in my area are currently selling for $200 per square foot. I want to sell the house and pay cash for something else (a lot cheaper, of course), and have some money left over. I also really want to take my daughters to Disneyland and New York.

 

I thought it might be smart to buy a house with a smaller guest house in the back that I could rent out or allow my adult daughter to live in if she wanted to. Also, I currently sell vintage stuff on eBay but would like to specialize in vintage fabrics. I could set aside some money to invest in that too.

 

 

I feel like this is my one chance to make a better life for myself and my daughters and I don't want to blow it.

 

Any constructive (not, "give it to me") advice on how to "invest" my money is greatly appreciated.

 

Thanks!

[carhill]

If you go 'cheaper', you can roll 250K of gain into it free of capital gains tax, presuming you make enough income to be subject to that and you're not married.

 

I'd set aside about 10% of the appraised value or your floor for acceptable offers, whichever is less, for costs of sale. Stuff comes up.

 

Do you have somewhere else to live or will you sell subject to a new residence closing or will you rent in between residences?

 

If you're in a local seller's market, will you be buying into it or locating elsewhere?

 

Myself, I'd keep the cash liquid for as little time as possible. As a very wealthy friend told me a long time ago... "Dirt, they're not making any more of it".

 

Depending on amount of profit available, you could crunch the numbers for investing in a modest replacement residence and a couple of rental properties.

 

I'm facing a somewhat similar challenge currently, selling off a few rentals to raise cash to buy residential and business property in another state while I retain my business and personal property where I live. The logistics and tax ramifications are chewing up a lot of time but, done right, it's profitable time.

 

Another friend, one whom I assisted in buying a beach house as an investment recently, told me a long time ago that we'll always run out of money before we'll run out of deals so choose them wisely. I think that bears repeating. Good luck!

[Hope Shimmers]

If you go 'cheaper', you can roll 250K of gain into it free of capital gains tax, presuming you make enough income to be subject to that and you're not married.

 

What are the restrictions on that in terms of exchange? Is it like 1031 exchange where the timing is so critical? And does it have to be a 'like' property (similar to 1031); in other words, you couldn't sell a primary residence and roll over into a rental?

 

I flip farms (investment) so I'm familiar with 1031 exchange but may be in a similar position as this OP with my primary residence so I hope my question helps him/her too.

[carhill]

Primary residences fortunately don't have to do the machinations of what is required for a 1031, nor incur the costs of QI (qualified intermediary) and/or any legal assistance required or desired. That's more in the realm of business and investment property. Given the parameters explained, it appears, regardless, some boot would be involved so subject to taxation outside of an otherwise tax-deferred exchange.

 

If the OP were to buy a replacement residence, the amount spent on that would count against her net gain on the sale with any remainder being subject to the 250K exemption and capital gains rules, as applicable, all of this of course presuming US residence.

 

In the OP's case, using reasonable figures like a 2000 square foot home, that would be a 400K gross sale less costs of sale of ~40K (prox, if sold via agent and typical), netting 360K - 100K COA plus any additions to capital basis since 1993 less any depreciation for business/rental use. Presuming null, 260K would be the net gain, of which 10K (260K - 250K exemption) would become possibly taxable at capital gains rates if no replacement residence was purchased. Hence, barring buying a singlewide in a mobile home park, the gain will be sheltered from taxation.

 

Of course, a tax adviser is the best source for up to date information and, boy does it change often! Also, if she has a 4000 square foot house selling for 800K, that's also a different kettle of fish, mainly different numbers and more exposure to potential capital gains taxes.

 

Myself, with that kind of gain, presuming the house is free and clear and I wanted to downsize, I'd buy a smaller residence and a couple rental SFH's. Much depends on the local housing market and the OP's skillset and time available for managing investments.

[carhill]

Oh, another investment idea along the lines of what the OP themselves were suggesting would be to buy a MFH, like a four-plex or similar and live in one unit and rent the rest.

 

Not having the cash in hand, I just missed a good deal on a fourplex that was owner-managed for 25 years and had sterling ROI numbers and was maintained impeccably. It sold for 40K under asking of 225K. Monthly net was 1850 and my research supported a rent increase. That's how it goes. Timing is everything in real estate.

[Hope Shimmers]

Thanks carhill. I hope I didn't thread jack and that the OP can get good information out of this too. It sounds like she might be in a position to benefit from this.

 

I fully agree that the way to go in terms of investing, if you can, is real estate. But you have to know what you are doing. Rentals are a great idea in the right location. What I do - flipping farms (some of which are undeveloped land which people buy for hunting mostly) - has made me a lot of money. It's not that hard to do, but I do make use of the 1031 exchange which means when I sell, I need to have something lined up to buy at basically the same time (and it must be a like property), and my capital gains from the sale go into the new property - no taxes! Theoretically you can do that until you die and never pay taxes on those earnings, and they can be substantial.

 

The first farm I bought at $925 an acre and sold a few years later for almost $3000 an acre (120 acres total). I also buy bigger plots of land and split them up to sell.

[carhill]

Makes sense. We do that with industrial property, creating 'suites' of land with improvements, ready to build, or build to suit. Stuff way beyond my pay grade; I just run the grunt portion of the job, interfacing with the city and the contractors.

 

Oh, regarding the 1031, my remembrance is that one can convert to conventional gain treatment by establishing primary residence for a period of time, I think two years but don't quote me on that. I looked into that before coming up with other means of avoiding taxes.

 

Whatever you do, don't buy in California to sell (investment property) cause Brown takes 3.3% of the sale price (not net) as withholding unless you lie and state it's your primary residence you're selling. Look up CA593. This occurs in any escrowed transaction and, ha, ha, they charge a fee for withholding the money and writing a check to the state. This occurs whether or not one owes tax on the sale or not. Only way to get it back is file for a refund with one's tax return. I'll be filing early this (2015) year, trust me. The OP won't have to worry about that, at least not with a residence, but could down the road with rental properties, depending upon state.

 

Oh, right....the rooming thing... if buying a house with guest quarters and intending to rent 'officially', be sure to check with the local city folks about zoning and other codes relevant to renting in such a fashion. Crabby neighbors can create problems so better to have everything square up front.

[loveweary11]

My simple advice is: Don't do what everyone else is doing when investing.

 

Take your time, think differently... and create a revenue stream if possible.

[TexasMan68]

Be aggressive dump it all into Bitcoins!!!!