Money Rehab with Nicole Lapin - So You Want to Sell Your House

Episode Date: March 9, 2022

Nicole has said many times that housing is an unpredictable investment…  but there is an exception to every rule. So, yes, it is possible to make a profit when selling your house. Today, Nicole tells you how. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your

money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. By now, I've told you so many times that housing is an unpredictable investment

that you're probably saying it in your sleep by now. Hey, unlike the housing market, I want to make sure that in money rehab, you get your money's worth, even if listening to this show is free. But there is an exception to every rule. Some people are able to make a profit when selling their house. And my goal on money rehab is to give you the tools to determine whether turning a profit is possible in your situation. And today's money rehabber, Caleb, is working on making that evaluation for himself. Here he is. Hey, Nicole, my name is Caleb and I live in Asheville. I bought a $300,000 house in 2019 and I'm thinking about selling it. I bought it pre-pandemic and since then, house prices in

my area have been on the up and up. What sort of factors should I consider when I'm deciding to buy? Also, I haven't paid off my mortgage yet. And I know that people sell houses without paying off their mortgages all the time. So I kind of feel stupid for asking, but how does that actually work? First things first, Caleb, there are no stupid questions in money rehab. Get it? Got it? Good. Next, in order to understand the process of selling a house, you're going to need to understand how home ownership works and how it's not as simple as it looks. It's really a question of how much of the house you own or how much equity you have in the home. This gets to your question, Caleb, around how to sell a house if you haven't paid off the entirety of your mortgage yet. The calculation to figure out your equity is very

simple. Home value minus mortgage equals equity. So let's look at your particular example, Caleb. You bought your house for $300,000. And I know you said that you think you can get more for it now, but for easy math, let's assume that the value is still $300,000. We're going to also assume, still $300,000. We're going to also assume, like any good money rehabber, that you paid 20% down as a down payment on day one before your mortgage payment even kicked in. So your equity equation at first would look like this. $300,000, your home value, minus $240,000, the outstanding mortgage, equals $60,000, or your equity. In other words, in the beginning of your home ownership journey, you have $60,000 of equity in your house. After three years of making payments, you probably paid off another $30,000 of your mortgage. This doesn't necessarily take

interest into consideration, but let's call it $30,000 for easy math. That means after three years, you're looking at an equity equation of $300,000, the home value, minus $210,000, the outstanding mortgage after three years, or $90,000 of equity. As you pay off your mortgage, you gain more and more equity in your house until you pay off your entire mortgage in full. That, of course, is the moment you've been waiting for. You can officially call your house all yours. There are two reasons equity is important to homeowners. Number one, how much equity you have in your house affects how much you can make if you sell the house. And two, you can borrow against the equity in your house, but that's a topic for

another episode. So back to our earlier example. If you have $90,000 of equity in your house, great. That is $90,000 with your name on it. But how do you get it? Houses are an illiquid asset, so that $90,000 isn't in between your floorboards, let's say. Unless you're borrowing against your equity, again, a topic for another episode, but unless you're borrowing, the most common way to cash in your equity is to sell your asset. If you decide to sell this $300,000 house, Caleb, you might be thinking, sweet, 300 grand in my pocket, and start looking at treehouse listings on Airbnb for your $300,000 vacation. Alas, this is not how it works. Before you can make any profit in your pocket,

you need to pay off the rest of your mortgage. So Caleb, going back to your example that I've taken some creative liberties with here, if you're selling the house now at a three-ish year mark, you still need to pay the outstanding mortgage sum, which I'm guessing is around $210,000. So if you sell it now, the only money going into your pocket would be your equity, so $90,000. This is yet another reason to opt for a 15-year mortgage because you earn your equity much faster. Say you're cool with all this and you decide to go through with the sale. You now have to think about a new problem. Your house is sold and you need to find a new place to live. You might just end up having to buy another $300,000

house, which is likely pretty similar to the one you just had. Unless you downsize, it's often a wash. And surprise, there are tax implications to selling your house as well. Yes, it's time to talk about everyone's favorite type of capital, capital gains taxes. If it's been a while since you listened to my episode on cap gains, here's a little refresher. Capital gains are a certain type of tax that is specific to selling an asset. There are two types of capital gains, taxes, short-term and long-term. Both are taxes, but triggered after different periods of time and have different rates. Short-term capital gains apply when you sell an investment before a year is up. Today, capital gains apply when you sell an investment before a year is up. Today, the rates are currently the same as ordinary income tax. If you're already a high income earner, and if you're

not, you will be soon, that ordinary income tax rate adds up a shit ton. Long-term cap gains are much lower. It's still a bummer anytime you have to give money to the government, but it is better when you can give less, right? And yes, selling a house has its own cap gains rules too. Figuring out what your tax situation would look like if you sold your house feels like a maze where you need to pass through multiple checkpoints to figure out what rules apply to you. So let's go through the maze together, shall we? I promise you will not get lost. Here we go. Has this house been your primary residence for less than one year? If yes, you have to pay short-term cap gains. If no, move on to the next question to figure out your tax situation. Has this house been your primary residence for more than one, but less than two of the last years?

If yes, you pay long-term capital gains. If no, move on to the next question to figure out your tax sitch. Has this house been your primary residence for at least two of the last five years? And no, those two years don't have to be consecutive. If yes, move on to the next question to figure out your tax situation. If no, you're headed into some murky tax waters and you'll likely want to consult a financial advisor. Are you married? If yes, you do not have to pay capital gains on the first $500,000 of profit from the sale of your house. If you made more than $500,000 in profit, first of all,

congrats, that's awesome. Second of all, you have to pay long-term capital gains on all profits greater than $500,000. If no, move on to the next question. Are you single? If yes, you do not have to pay capital gains on the first $250,000 of profit from the sale of your house. If you made more than,000 in profit. First of all, again, congrats. That's awesome. Second of all, you do have to pay long-term capital gains on all profits greater than $250,000. There goes capital gains tax again raining on our parade. But capital gains tax assumes that you made money through selling your house. But what if you didn't? For example, say your house is now valued at $200,000, much less than the $300,000 you paid for it, and importantly,

less than the current value of the mortgage. This is a situation where you owe more than the house is worth. If you're trying to sell your house under these circumstances, it's called a short sale and you as the homeowner will be considered upside down. Short sales happen, but they're very difficult to maneuver. If you have good reasons for needing to sell your house short, you can talk to a lender and see if something can be worked out. It's possible to create an arrangement with the lender where you don't end up paying back the entire mortgage. However, it's a lose-lose for both the borrower and the lender. This is a headache you'll never deal with if you're renting. Just saying. For today's tip, you can take straight to the bank. In most cases, you have better chances of making a profit on selling a house the longer you live there. By taking several years to nest before you up and

move, you have the advantage of having more equity in your house and playing the cap gains tax game. So when it comes to selling your house, patience is absolutely a virtue. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine law for her production and writing magic and Brandon Dicker for his editing engineering and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.