Buy more lottery tickets!
A friend of mine wants me to see her financial advisor. She thinks every move I make is a mistake. This inspires a lot of confidence in me; but I try to be humble. I know what her advisor will tell me, “Move to Detroit and camp out in an abandoned building. If you aren’t arrested or forced to move because the building is to be bulldozed in order to plant turnips, you might be able to get by on your Social Security.”
I explained to her more than once that I might be ready to do this next year, but for now I’d like to struggle and worry in sunny, smogless Santa Cruz. I think of myself as a concept person. I admit that for the last couple of years my concepts haven’t been very profitable, but not for my lack of trying. Before the current financial crisis I owned several rental properties, had equity, a decent commissioned income selling real estate and a plan. Then the crash happened. I hocked my house to stay afloat. My income plummeted. My equity vanished. The IRS changed the rules about investment property. My plans went south, and not to Florida for the winter.
IRS rules currently allow you to sell your primary residence and exempt tax on the gain: $250,000., if single, $500,000., if married. Investment property may be exchanged in order to defer taxes on the gain. If you sell, you pay the tax. No exemptions. A few years ago you could move into your investment property and make it your primary residence. If you lived there the required two years, when you sold the property you could take the exemption for your primary residence. This rental-to-primary-residence scenario was part of my master plan. It was how I could turn equity into cash for my old age. Other people used this formula. The IRS didn’t like this because they want the money, so they changed the rule.
The new rule: If an investment property is converted to a primary residence, the length of time it was a rental and the length of time it is your primary residence determines the tax consequence when you sell. If you’ve owned a rental eight years, move into it for two and then sell it, eighty per cent of the gain will be attributed to income property and twenty per cent to your primary residence. This may be a fair rule, but it left me dangling on a string. No net. No golden parachute.
I no longer have equity in my house or much in my “income property,” which never provided income. The expenses were always greater. When I sell my house, the IRS will get any money left after cost of sale. My only hope is to trade my four-plex, which is a legal duplex (that’s a future blog,) into the condominium downtown, where I would eventually like to live. I’ll get an adjustable mortgage, instead of a thirty year fixed rate loan, because the interest is lower and fixed for seven years. It’s the only way I can afford the payments. It’s a temporary solution, a seven year solution. It’s all I can do today.
I’m resisting, rebelling against all practical information and financial planning. I’m punting. “Let them eat cake,” said Marie Antoinette about us 99%. But I want to “have my cake and eat it too.” I will stay in Santa Cruz until dementia solves my dilemma and I won’t care where I live. Then I’ll pack my stuff in a Safeway shopping cart and head for Detroit.
