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Is Your Home Holding You Hostage? (Part 2: Homeowners)

Last time we talked about L.A. Rent Control and its downsides to renters.

Today, we'll take a look at homeowners and see what's keeping them in their homes a lot longer than they originally planned: Only in Los Angeles do real estate prices increase so much that it actually causes problems for homeowners.

First world problems...

It's called Capital Gains Tax, and it’s a real hot-button issue in Los Angeles. In the rest of the U.S., most homeowners don't get taxed on an increase in value when they sell their home.

Example: You live in Iowa. Buy your house for $150,000, sell it 20 years later for $250,000, make $100,000. You don't get taxed on that income.

In fact, most married homeowners won't get taxed anything as long as their home increased less than $500,000. Most people in the U.S. never have to worry about this. In a few cities, like Los Angeles, it's a very real possibility that their home's value would increase more than $500,000 while they lived in it, and have to pay taxes. Terrible, right?

Example: You bought a house in L.A. for $200,000 in 1990. Today it's worth $1.5 million. That's an increase of $1.3 million over 25 years. Now, you wouldn't be taxed on the first $500,000 if you're married, but you would on the $800,000 left over. Maybe by 20%. That's $160,000.

Disclaimer: For informational purposes only. Please consult your accountant on your specific situation.

The bottom line...

Homeowners are absolutely PARALYZED by this $160,000 tax bill even though they actually made out like bandits. Let's remember the key takeaway. After everything is said and done, they walk away with over $1 million in net proceeds by simply paying their mortgage years.

My question: Was that full $1.3 million ever really yours? I'd say No. This is not a calculated financial investment.

In fact, when you live in a home for DECADES, and your value increases by over a million dollars, the amount of equity you have is 100% arbitrary.

Here's a crazy question: What if your home only appreciated by $500,000? Truthfully, I could see MORE homeowners being happy about this because they don't have to pay taxes. They could sell their house scot-free and move on--even though the alternative is walking away with literally double the amount.

Decisions, decisions...

If our house appreciated by over a million dollars, we have to consciously make the decision to willingly pay a LOT of money in taxes instead of "keeping it for ourselves" (which is a fallacy).

This sounds a lot like a Jerry Seinfeld routine: "According to most studies, people's number one fear is public speaking. Number two is death. Death is number two! Does that sound right? This means to the average person, if you go to a funeral, you're better off in the casket than doing the eulogy."

So what should you do? Make a lot of money and pay taxes? or do nothing? Most homeowners in this situation opt to do nothing. It's easy. No decision. Keep the status quo.

Here's a great example about decision making:

In Germany, the percentage of people who participate in the organ donor program is 12%. Right next door in Austria, it's over 99%. Why the stark difference? Culture? Values? Religion? Nope.

  • In Germany, you have to check a box to participate. (12% enrollment)

  • In Austria, you have to check a box NOT to participate. (99% enrollment)

Instead of downsizing, moving to the beach, having brunch on the boardwalk, doing exactly what they've wanted, they are held captive by a TAX for decades of their Golden Years... ... because they refuse to make the decision to pay the tax.

The Science of Making Decisions:

The "Monty Hall Problem" is a fun statistical analysis of decision making. Pretend you're on "Let's Make A Deal". Three doors, a new Cadillac behind one door, and goats behind the other two. You choose Door #1. Then Monty shows you the goat behind Door #3. Do you change your decision from Door #1 to Door #2? You should.

It has been proven through countless simulations that if you consciously make the decision to switch, you double your odds from 1-in-3 to 2-in-3.

It's a fact.

To The Bold Go The Spoils:

The brave homeowners pull the trigger, pay the tax, and live the life they want to live. The rest stay in the home until they die, leave the estate to their children to deal with. More often than not, the kids "cut and run". Do you see taxes going up or down in the future?

So here it is… Monty Hall just showed the goat behind Door #3. You have two options:

  • Door #1. Stay in the home, put your dreams on hold indefinitely.

  • Door #2. Rip off the band-aid, take your money, and live your life.

Life is NOT a dress rehearsal. You worked hard your whole life. You earned it.

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