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Break the Homeowner Liquidity Trap with Better Tax Planning

By TaxWealth -

Long-time Silicon Valley homeowners who bought homes back when there were more orchards than tech companies face a liquidity trap when they decide to sell their homes.

The dramatic rise in home values over the last 30 years has had the happy result of substantial return on the homeowner’s original investment. However, along with soaring appreciation rates comes a profit-crushing capital gains tax bill due for the year of sale the moment the sellers receive their sales proceeds.

It’s not uncommon for some long-time Silicon Valley homeowners to find themselves “house rich but cash poor.” It’s a dilemma for would-be sellers. They have a sizable amount of equity and would like the flexibility to use those resources in other ways. Equity rich homeowners may want to downsize or move out of the area to be closer to family or are looking for a slower pace, less crowds and traffic and lower living expenses. Yet, after paying closing costs, commission, the enormous tax bill and pay off any mortgage they are left with so little it just isn’t worth it to sell. This predicament leaves homeowners with few choices and trapped in property they may no longer want to live in or own.

To further compound this issue:

  • Some sellers may have had non-tech careers with lower salaries, little or no retirement and little savings. Thus, they need their equity to live off of.
  • Aging homeowners may be experiencing health and/or mobility issues and need to move to more suitable living arrangements. Such arrangements can come with a hefty monthly price tag. Unshackling their equity would enable homeowners to use those funds to cover their living expenses.
  • Some have tapped that equity to fund other projects, or consolidate debt, and may have a “debt over basis” tax issue.

Linda McKnight knows these homeowners well. As a Silicon Valley Realtor®, she regularly works with homeowners who suffer sticker shock when they discover what their tax bill will be once their home sells. Seeing sellers experience this time and again, Linda saw an opportunity. If she could solve the tax bill obstacle she would be helping her clients keep as much of their profit intact as possible and move forward with their lives.

“Over time, I have become a ‘capital gains tax specialist’.” says Linda. “A successful outcome requires proactive planning in advance of putting the property on the market. I work with teams of advisors who help my clients minimize the tax burden, especially those who have planned on the appreciated value for a good chunk of their retirement fund.”

Linda’s arsenal of advisors include a CPA, a tax planner, a tax attorney, a trust attorney and financial advisors. “If my clients have their own advisors, my team and I work along side their advisors to provide education and support. Our goal is to proactively craft the most time and cost efficient plan for the upcoming sale. We want our sellers to keep as much of their profit as possible in their pocket.”

Earlier this year Linda brought in TaxWealth, a tax analysis and solutions research company, to create a tax-advantaged plan to sell a residence for homeowners that were stuck in the liquidity trap.

Original Purchase Price $500,000
Years in the home 30
Current property value (as appraised for sale) $3,600,000
Homeowners’ exclusion (husband and wife) $500,000
Outstanding home loan balance $1,400,000
Net Capital Gain $1,200,000
Estimated Tax Liability $700,000
Net funds available for retirement $500,000


They needed a better plan than just paying the tax bill! TaxWealth found that they qualified to use a specific type of Installment sale, coupled with a monetization loan, that allowed them to lawfully sell their home, defer the taxes for decades, and receive $1,140,000 in funds at close of escrow instead of $500,000. This allowed the sellers to follow through on their original retirement plan to move out of the area and downsize into a low-maintenance townhouse.

“This is not a free lunch,” noted Linda. “The taxes are still due at the end of the deferral period. But the way this tax-advantaged structure works, they can invest the $1.1 million to grow while still funding their retirement plans. Decades later, when the tax bill is due, it can easily be paid with inflation adjusted proceeds of the investment plan.”

The liquidity trap is now broken for this homeowner, just as Congress intended when they put installment sale loan tax deferrals into the tax code nearly a century ago.

“Many homeowners are unaware of the tax planning approach options they have available to them,” says Linda. “But I am on a quest to find and educate as many homeowners who are in search of solutions as I can!”

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