Real Estate at Lake Tahoe the A, B, C’s of Investment at Tahoe
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Information and discussion Here is strictly based on opinions by Robert Dickerson. While I have been in the real estate business for more than 20 years, I am required to inform the reader that I am not a qualified financial advisor. You can read this material, but contact your own personal professional financial and tax advisors before acting on any of the discussion or advice.
A. Invest in your own home, but do not stay past the time when the profit will be $500,000 or you will pay income taxes on the excess profit
When you think you are reaching the limit, list your home at a price that will allow you to realize the entire $500k after selling costs. If it sells, buy another and start over again.
B. Invest in rental or second home property. At Lake Tahoe you can do this with 25% downpayment.
At Lake Tahoe, you can typically pay about one-half the expenses of owning through vacation or full time rental of the property. Interest, property taxes, maintenance, etc. typically run about 8% of the property value per year. Pay half that (4%) from rentals, then your only out of pocket is 4% per year. With property values escalating at 15% per year, your paper profit would be 11% per year. Not bad at all, if you only put 25% down payment and closing costs. The first year, your 25% down plus your 4% out of pocket will net you that 11% appreciation (tax deferred), or about 44% return.
If you make this second home investment a rental, and if it is a home you could stand to live in for two years, you can move into it when your main house sells, live there for two years then the entire profit is tax-free, up to $500k. This is a way of accelerating the tax free profit benefit to almost $250k per year, if the real estate market tends to keep its current rate of appreciation.
If you do not move into the property, but just re-sell the property after a few years, do not forget the selling costs of about 7.5 to 8.5%. This eats up most of the first year’s appreciation, so plan to keep the rental 4-5 years at least.
C. Invest in vacant Tahoe land in California. Building permits are available after an allocation is obtained. Right now the waiting period is as high as 8 years. But, when that allocation is obtained, it can appreciate the property by as much as 60%. That 60% figures to be about 7.5% per year. Right now you cannot earn that much on your money in the bank. The 7.5% per year is in addition to the general appreciation of real estate, typically averaging about 15% per year, for a total of 22.5% per year. Again, this appreciation is tax deferred until you sell the property.
If you invest in land and make this wonderful profit, you will then have to face the payment of income tax on the profit when you sell. But, wait a second! If Handled properly, You can do a 1031 Tax deferred exchange and use your profits to purchase a second (vacation) home of equal or lesser value, or a rental home without paying any taxes. If you use that place as a second home or a rental home for a couple years you can then move into it as a full time residence. After 5 years of ownership, including at least two years of residency, up to $500,000 of appreciation (including the profits on the lot) become shielded from income taxes. Consult your tax advisor on all these situations.
D. You can purchase a much older home if you are really ambitious, with intentions of re-building it or at least extensively re-modeling it. Houses referred to as “Tear Downs” need to be almost completely demolished and re-built as effectively new homes on the same lot. Since the early Taho-ites tended to build their smallish 40’s homes on the best view lots, you can convert a $400k property into a $4m property just by putting a $2.5m home onto it. Your need to know what you are doing to accomplish this feat.
If you are just going to re-model, it helps to have the services of someone who is a decorating genius.