patrick.net

Malcolm,

I still don't think you should add transaction costs at the end for the FB. You could just as logically add a transaction cost for the JRB at the end, which would assume that they would buy a house with their savings.

I don't see why anyone needs to sell their home at the end of analysis. Even in the case of someone dying, their heirs could just chose to hold onto the home, either to live in or rent out.

Which reminds me, does the basis cost for tax purposes of real estate get adjusted up the same way it works for stock? I am hardly in a position to do estate planning yet, but it would be an interesting thing to know.

@ eburbed,

I've come to the conclusion that EVRYTHING goes up and down together in the new economy. There is no benefit from diversification of asset class or international/domestic. It is all about liquidity. Is the spigot on or off? Lately it's off but at anytime the FRB may decide it's time to turn it back on and at that point your tech stocks will be moving up again.

Paul

'Which reminds me, does the basis cost for tax purposes of real estate get adjusted up the same way it works for stock? I am hardly in a position to do estate planning yet, but it would be an interesting thing to know. '

A couple of things since I think I know what you are asking:
Under prop 13 your taxable basis is based on the market value of the house at the time of purchase, and can also be adjusted at a time you add someone to the title or sell to a new buyer. The tax rate is a flat 1% plus local voter approved assesments. The assessed value varies with the market but it basically is irrelevant because the actual tax bill can only go up a maximum of 2% per year. It is capped. So in my case even though my house almost tripled in value, my tax bill is only about 10% higher than when I bought the house. 2% increases in property tax is nothing. It is a genuine perk.

If you are asking about the cost basis for depreciation, or for captial gains, the cost basis is what you paid for it, and you straight line depreciate the improvement portion over a fixed amount of time. I think it is 28.5 years, but I'm not 100% positive of the time period. This applies to investment properties since you have gains exemptions on your primary residence.

Jimbo, even though the transaction costs are significant it doesn't change the outcome. You are correct in your challenge, but again, I would have to say without a harvest there is absolutely no point to paying 3 times the monthly cost to live in the house. Someone would be better off sitting on the sidelines until either it seemed rents were going to skyrocket, or prices plummet to justify the decision.

The percentage of people who stay in the same house for 40 years is minscule. I'd speculate that it is less than 5%. In doing financial modeling you would normally use an average which currently is someone moving after 7 years. In that case, the proposal is ludicrous.

Sorry, I meant to ask if the cost basis got adjusted upward after you die.

If you own stock, when you pass it on to your heirs, they get the basis adjusted upward to the value it was worth when you died, potentially giving them a huge tax break. This is called a "step up in basis."

http://www.pathtoinvesting.org/fyp/cost_basis_stock/cost_basis_041.htm

Does real estate get the same break? Somehow, I doubt it, but I am curious.

Yes, I agree, for the average investor it makes no sense whatsoever.

But in modeling for a person's individual personal case, you can make different assumptions, based on what you plan on doing in your life, and see how the numbers work out with your plans.

If fact, one could argue that this is called "retirement planning" and doing a good job at modeling various scenarios and picking the best one is the key to prosperous and comfortable Golden Age!

Parents can transfer property to their heirs at the same cost basis in California. Also to a grandchild if the parents are deceased. This is up to $1,000,000.

A change in ownership includes almost all transfers of title in real property. Some changes of ownership that are excluded from reappraisal include the following:

The transfer of property between husband and wife;
The transfer of the principal place of residence between parents and children (and the transfer of up to $1 million of any other real property between parents and children) if an application is filed properly (Proposition 58);
Persons over 55 years of age can buy a residence of equal or lesser value than their existing home and transfer the current tax value to the new home within the county (Proposition 60).

Jimbo,

Your heirs get the property at the stepped up basis so there is a huge tax break when they sell (capital gains). Furthermore, because of Prop 58, you can pass on your property at its Prop 13 value. There are some limits which you can read about here:
http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm#4
Overall, strong incentives to never sell a property once you have it. My (free) advice is:
1. Sell half the duplex to your renters (when are you going to see these prices again :-) )
2. Enter the condo lottery (you should win sometime in you lifetime)
3. Pass your condo onto your kids (in the mean time, rent it out or live in it).
Not financial advice.

Yeah EBGuy, I think that is exactly the best course of action, financial-wise. Condo conversion causes a step-up in Prop 13 tax basis, but we didn't buy *that* long ago.

I doubt this is going to happen though, we will probably end up keeping the whole place, but that is not a financial disaster either, just not the fastest way to retirement.

I'll bet a lot of attorneys are hating life since the Internet came on line. All of those links are money out of their pocket for legal advice. Life is good.