May Reporting Roundup: Never a Better Market Edition

It’s time once again for the monthly reporting roundup, where you can read my wry commentary about the news instead of subjecting yourself to boring rehashes of the NWMLS press release (or in addition to, if that’s what floats your boat).

To kick things off, here’s an excerpt from the NWMLS press release:

J. Lennox Scott, chairman and CEO of John L. Scott, Inc. called 2015 “the best start ever for sales activity.” Citing MLS figures, he noted cumulative pending home sales in the four-county Puget Sound area for the first five months of the year are outpacing the previous record year of 2005. “This time,” he emphasized, “the housing market is built on a strong foundation of qualified buyers.”

“Locally, home prices are continuing to rise at a steady pace, and they continue to outpace both inflation and wage gains,” observed Mike Gain, CEO/president at Berkshire Hathaway HomeServices Northwest. Pent-up demand is pushing inventory lower, he notes. Gain believes the supply challenges could be alleviated if more sellers put their home on the market. “Sellers may never see a better time to be a seller,” commented Gain, a former chairman of the Northwest MLS board.

Mike Gain expects historically low interest rates, a growing economy, improving consumer confidence and consumer finances will continue to fuel activity and push up the numbers. “Anyone who can buy a home today at today’s prices with today’s low interest rates should do it. In my opinion, prices and monthly payments will never be lower than they are today.”

I love it when salespeople throw around over-the-top hyperbole and absolutes like “never.” No way that will ever come back to haunt them.

This month I could only find three articles in the local media outlets about the latest NWMLS numbers, despite waiting all weekend for more stories to come in. Apparently “yeah, it’s still a terrible time to be a homebuyer” is not considered very newsworthy.

Read on for my take on this month’s local news reports.

Seattle Times

Sanjay Bhatt: Home-price boom: What $450K will buy you around Puget Sound

The [inventory] shortage in King County is historic: May marked the third month in a row the county had less than a month’s supply of homes and condos for sale, which hasn’t happened since at least 2004, according to a Seattle Times analysis of MLS data.

“You’re at crisis levels. Something’s got to be done,” said Stephen O’Connor, director of the Runstad Center for Real Estate Studies at the University of Washington. “There has to be some level of comprehensive strategy here to figure out how to bring in more supply.”

With interest-rate hikes on the horizon, buyers appear willing to duke it out in bidding wars and pay a premium for living in King County’s urban corridors to avoid long commutes and surging rents, real-estate agents say.

“It’s like buying a loaf of bread for $10 because there’s nothing left on the shelf and you’ve got company coming,” said Mark Ossinger, a Seattle-based designated broker for Fathom Realty.

Oh man, I am totally going to get into the bread sales brokerage business.

Puget Sound Business Journal

Marc Stiles: And you thought Seattle’s housing market couldn’t get any tighter

The number of condo and house sales in the central Puget Sound region jumped 15 percent last month over the previous year, even as the number of residences for sale dropped precipitously.

The result: an even tighter housing market with home prices climbing at more than 9 percent, according to data the Northwest Multiple Listing Service (NWMLS) issued on Thursday.

In a balanced market, there is a four- to six-month supply of inventory. But in King County there was only 1.2 months of inventory last month, and several neighborhoods near Seattle’s job centers had less than a month of supply.

To be honeset, there isn’t much substance to the PSBJ article this month. It was mostly just a slight rehash of the press release.

Tacoma News Tribune / The Olympian

Rolf Boone: Home sales rise, prices soar, inventories dip in latest Washington real estate report

Severe inventory shortages.

Prices up, and multiple offers for homes for sale in many neighborhoods.

According to the Northwest Multiple Listing Service, May was a great month to be selling a home but a not-so-good month if you were looking to buy.

“The crush between the lack of inventory and desperate buyers may soon generate the next TV reality show,” stated Dick Beeson, an MLS director and principal managing broker at RE/MAX Professionals in Tacoma.

Similar story in the News Tribune this month. I guess there is only so much you can say about low inventory.

(Sanjay Bhatt, Seattle Times, 06.04.2015)
(Marc Stiles, Puget Sound Business Journal, 06.04.2015)
(C.R. Roberts, Tacoma News Tribune, 06.04.2015)

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

82 comments:

  1. 1

    The Seattle Market Has Always Been a Bad and Expensive Place for Most Us to Buy In To

    In 1980, it took two incomes to buy a Seattle House, one for mortgage and the other for food and other bills.

    In 1990 it improved slightly with the Savings and Loan Crisis and price degradation, but the bottom line, you still had to pay half a decent gross income for a below average house.

    In 2000 prices were on their way up waiting for the 2007 Great Recession bank collapse and subsequent under water loans [many are still under water].

    In 2010, we just forgot the past history and forged ahead with this $250K/yr household incomes are really Middle Class. When Middle Incomes are more like $60K. Weasel Wording.

  2. 2

    RE: softwarengineer @ 1

    I am actually very happy to see that your negative attitude toward Seattle’s home prices dates back to 1980.

  3. 3
    redmondjp says:

    RE: softwarengineer @ 1 – Dude, what are you talking about?

    I bought my house in Redmond in 1998 for just over 3X my gross salary at that time.

  4. 4
    greg says:

    By redmondjp @ 3:

    RE: softwarengineer @ 1 – Dude, what are you talking about?

    I bought my house in Redmond in 1998 for just over 3X my gross salary at that time.

    I bought my house in Kirkland in 1998 for just over 5x my gross salary at that time.

    my salary at the time was about 130% of average

  5. 5
    John Wake says:

    “I have no interest whatsoever in my financial advisor being an optimist.” Daniel Kahneman, Noble Prize in Economics. https://youtu.be/tyDQFmA1SpU

    I wonder… would Kahneman want his real estate agent to be an optimist?

  6. 6
    I'm just here so I won't get fined says:

    RE: softwarengineer @ 1

    Yeah! you tell em SWE, all those people who bought a home in 1980, held onto it and paid off the mortgage have got to be kicking themselves now. They probably feel Soooo dumb.

  7. 7
    Mike says:

    By softwarengineer @ 1:

    In 2010, we just forgot the past history and forged ahead with this $250K/yr household incomes are really Middle Class. When Middle Incomes are more like $60K. Weasel Wording.

    In 2010 (actually a little later than that) $60K/yr could afford to buy a decent house in much of the Seattle area provided you had good credit and 20% down.

  8. 8
    Jack says:

    “supply challenges could be alleviated if more sellers put their home on the market. ”

    Duh.

  9. 9
    Walt says:

    I’m going to wait to buy until after the next big earthquake. Surely that’ll either increase the inventory by sellers wanting to dump homes or slow the interest of people moving in. Those craftsmen homes in Ballard should be in my price range after a few fall off the foundations–retrofits be damned!

  10. 10
    Dingo 6 says:

    Mike Gain: “Sellers may never see a better time to be a seller”

    Mike Gain: “Anyone who can buy a home today at today’s prices with today’s low interest rates should do it. In my opinion, prices and monthly payments will never be lower than they are today.”

    Both these things can’t be true at the same time.

  11. 11
    wreckingbull says:

    Great. It’s a wonderful time for sellers. So the seller sells. Then what? I suppose for those moving out of the area, downsizing to a modest condo, or moving into a convalescent home, then yes what a wonderful time to be a seller.

    If the seller is also a buyer, it is a terrible time to be a seller.

  12. 12

    RE: Mike @ 5
    Yes, Subprime Loans

    Many of those under water buyers used short sells as the only way they could afford to unload the house before foreclosures, after that mostly failed.

  13. 13
    David B. says:

    RE: wreckingbull @ 9 – It’s a great time for speculators and investors to unload and cash in. For those exchanging one home for another, even if you’re downsizing into a condo it’s not a good time to sell: condos are in short supply as well. Unless as you already posted you’re leaving this area for someplace where inventory is not so short.

  14. 14

    RE: David B. @ 11
    Retirement Planning

    And using your house equity as an equivalent 401K. The problem is capital gains, you have 3 years to reinvest any equity gain back into real estate or pay income tax on the windfall. Also, risk…..when you hit retirement you need money stored away in low risk. Selling a house means one thing, you don’t know what its worth until the ink dries on the escrow papers. Assumptions are worthless, it could be much higher or lower than you predicted.

  15. 15
    Weasel says:

    RE: Walt @ 7 – I wouldn’t count on it. After the 2010 (7.1) and 2011 Christchurch NZ earthquake (6.3 this was more damaging) the worst affected were displaced renters and home owners with wrecked houses looking for rentals. Rentals and houses worth buying became very hard to find and expensive, those that owned homes that were still livable were the best off. Five years later there are still entire streets devoid of houses, this drone video shows a then and now view of some of these areas. https://youtu.be/ZtZqtLzcRRY , Seattle might bounce back quicker being the home to many tech companies, the deserted areas of Christchurch would suggest that once people leave they dont come back, and neither do the jobs to attract new people.

  16. 16

    By Dingo 6 @ 8:

    Mike Gain: “Sellers may never see a better time to be a seller”

    Mike Gain: “Anyone who can buy a home today at today’s prices with today’s low interest rates should do it. In my opinion, prices and monthly payments will never be lower than they are today.”

    Both these things can’t be true at the same time.

    That’s pretty classic real estate industry BS. It’s always the best time to buy and the best time to sell. As far as home prices and interest rates never being lower than they are today? How does he know? Is he a time traveler from the future?

  17. 17
    Azucar says:

    By softwarengineer @ 12:

    RE: David B. @ 11
    Retirement Planning

    And using your house equity as an equivalent 401K. The problem is capital gains, you have 3 years to reinvest any equity gain back into real estate or pay income tax on the windfall.

    Have you ever heard of the Capital Gains Exclusion? For a couple, $500,000 worth of capital gains can be excluded… so if bought the place for $400k and are now selling it for $900k to move into assisted living (or to Kansas to wither away), you don’t have to reinvest the equity to avoid paying income tax on the windfall.

  18. 18
    Erik says:

    RE: wreckingbull @ 9
    I’m selling in 2024 if it feels like a top. I will likely acquire more real estate before then. Regardless, I’m selling when I think we are at the top and moving into an apartment.

  19. 19
    Erik says:

    RE: Azucar @ 15
    That’s why I do the 2 year remodel.

  20. 20

    By wreckingbull @ 9:

    Great. It’s a wonderful time for sellers. So the seller sells. Then what? I suppose for those moving out of the area, downsizing to a modest condo, or moving into a convalescent home, then yes what a wonderful time to be a seller.

    If the seller is also a buyer, it is a terrible time to be a seller.

    If it’s not a good time to be a seller(because inventory is so low, and if you plan on owning another place in the area), and it’s not a good time to be a buyer, then who is this market good for?
    It’s not good for buyer’s agents, because of the low inventory and multiple offers. Is it good for listing agents? The brokerage that I’m affiliated with has seen an increase in the number of agents, but there’s less inventory, less for sale. More agents and less listings overall. I’m sure for some long established listing agents, they’re doing just fine. But the rest?
    Never a better market. But for whom?

  21. 21
    Mike says:

    RE: Ira Sacharoff @ 18 – Developers with a large inventory of finished lots ready to build.

  22. 22
    Jack says:

    By Azucar @ 15:

    By softwarengineer @ 12:

    RE: David B. @ 11
    .. so if bought the place for $400k and are now selling it for $900k to move into assisted living (or to Kansas to wither away), you don’t have to reinvest the equity to avoid paying income tax on the windfall.

    I see what you did there.

  23. 23
    Blake says:

    Two interesting items:
    1. West Vancouver home is in contract to be sold for $1.1 million over its asking price of $2.98 million. “We got nine offers with the majority of bids from local buyers, ranging from full price to $4.1 million,” said Royal LePage Sussex listing agent Viv Harvey. The winning bid of $4.1 million came from a mainland Chinese “offshore buyer who has a house here already. He is buying the land to build a house for himself or maybe to resell it. He hasn’t decided,” said Harvey.
    http://www.vancouversun.com/business/West+Vancouver+home+sparks+bidding+sells+million+above+asking/11117034/story.html#ixzz3cbWjcRpX

    Note: My banker here in Seattle told me today that he wishes he spoke Mandarin… he needed a translator for his meetings this morning!

    2. Millenials priced out of the coastal cities… Seattle is #7 on the unaffordable list.
    https://confoundedinterest.wordpress.com/2015/06/08/go-midwest-young-man-millennials-price-out-of-coastal-cities/

  24. 24
    Blurtman says:

    RE: Blake @ 21 – My neighbor refers to the local Sammamish neighborhood as Bollywood.

  25. 25

    RE: Azucar @ 15

    I Won’t Give You Tax Advice

    But the three exclusions, health, unforeseen circumstances and unemployment are exclusions to the capital gains. See a tax expert and realize this too…..tax laws change.

    http://taxes.about.com/od/taxplanning/qt/home_sale_tax.htm

    As far as withering away in Kansas, I’m staying put in the Seattle area to milk the high property taxes that pay for various family member support and don’t exist in Kansas. Thanks for your property tax support, SWE appreciates it…..LOL.

  26. 26

    RE: softwarengineer @ 23

    More on the Capital Gain Exclusion

    Snippet:

    “…Years ago, the IRS charged no tax to homeowners if they sold a primary residence and rolled over the proceeds from the sale into a new home. But that rule is long gone. Based on the information you have included in your question, you will have a sizable gain on the sale of the home and will need to pay taxes on that sale. The good news is that capital gains rates are lower than ordinary income tax rates, but you’ll probably have to pay a good chunk of money to the IRS….”

    http://www.washingtonpost.com/realestate/when-capital-gains-tax-applies-to-primary-residence/2014/04/03/a4f27cee-b602-11e3-8cb6-284052554d74_story.html

    Pay attention to the part that adds a 3.8% surcharge for Medicare….

  27. 27
    David B. says:

    RE: softwarengineer @ 24 – Selective quoting at its worst. That article starts out:

    “When it comes to principal residences, the IRS gives homeowners a huge break when they sell their homes for a profit. If you’ve lived in your home for two out of the last five years and sell, you can exclude from capital gains taxes $250,000 in profits from the sale. If you’re married, you are entitled to exclude $500,000 in profits.”

    So Azucar’s example of a couple cashing in on $500K of equity and moving out of the area to retire is completely plausible, sorry.

  28. 28
    astelin says:

    RE: Ardell DellaLoggia @ 2 – I’d like to hear what he has a positive attitude on, personally. :-)

  29. 29

    RE: David B. @ 25
    And Ends Suggesting They Owe the IRS Money
    Not selective at all.

  30. 30

    RE: astelin @ 26
    I’m Positive Toward Acquiring Foreclosed Homes on the Cheap

    I’m positive on you buyers paying even higher property taxes to keep my family’s social supports afloat.

  31. 31
    scaredy cat says:

    RE: softwarengineer @ 27

    Yeah for someone who owned the condo less than two years:
    ‘I bought a condominium in February 2012 as my primary residence for $229,000 and sold it in October 2013 for $385,000.’

    The far far more common scenario is folks bought their house years ago, raised their families there, and are now selling to downsize and will use the gain to help support their retirement. Those types of folks will absolutely qualify for the 500k exclusion.

    The current law is if you live in it for 2 of the last 5 years you can exclude up to 500k. In my mind there is little doubt that the tax law change to allow the 250k / person exclusion is one of the things that has MOST benefited DIY flippers and an some senses has contributed to the longer term increase in prices.

  32. 32
    kenmorem says:

    RE: scaredy cat @ 29
    that is actually not the current code. capital gains are now taxed at a prorated rate based on the time you lived there compared to rented. so, if you own the house for 10 years, lived there for 3 years, and rented for 7, you would be able to shield 30% of the capital gains.

  33. 33
    scaredy cat says:

    Kenmorem,

    Curious what that is from as 2014 IRS pub 523 says:

    Your sale qualifies exclusion
    of $250,000 gain ($500,000 if married filing jointly) if
    the following is true:
    You owned the home and used it as your main home
    during at least 2 of the last 5 years before the date of
    sale.
    You did not acquire the home through a like-kind exchange
    (also known as a 1031 exchange), during the
    past 5 years.

    You did not claim any exclusion for the sale of a home
    that occurred during a 2-year period ending on the
    date of the sale of the home, the gain from which you now want to exclude.
    Page 2 Publication 523 (2014)

    Maybe we’re talking about different things?

  34. 34
    ray pepper says:

    crap! haven’t been here since Wilson threw the INT in the endzone…I had an infarction and blacked out… its all coming back to me now. Someone get me up to speed…?????!

  35. 35
    kenmorem says:

    RE: scaredy cat @ 33
    here’s my source:
    http://www.financialsamurai.com/tax-free-profits-for-home-sale-250000-500000/

    be sure to read the comments section as well.

    after i came across this article, i forwarded it to my in-laws who were contemplating remodeling one of their rentals while living in it for 2 years to meet the exclusion. he did extensive research on the topic and agreed that the 2 in 5 rule is no more.

  36. 36

    RE: kenmorem @ 35
    Great Tax Research

    One thing about the IRS, it keeps changing. That’s why I don’t give tax advice for the future.

  37. 37

    RE: softwarengineer @ 36 – Taxes are complicated and often turn on more than one fact. That’s why a real estate agent should never say someone can sell tax free if they have lived in the house X of the last Y years. Anyone who doubts that should read this:

    http://www.irs.gov/publications/p523/ar02.html#en_US_2014_publink100010381

    or this:

    http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses-and-Sale-of-Home/Property-%28Basis,-Sale-of-Home,-etc.%29/Property-%28Basis,-Sale-of-Home,-etc.%29-5

  38. 38

    RE: Kary L. Krismer @ 37
    National and Local Governments are Currently Looking for More Tax Money

    Very Hard too. The board I serve for a medical care giving company was recently dragged into sales tax litigation for using a tax free medical kit, because some of the stuff in the kit could be construed as taxable items….L&I for the contractor employees was another county grab for money causing a court case, but that failed for the county.

    If you’re a caregiver of a sick spouse or parent to help save the family estate…..be very cautious [and that may not help either] before they die. You could be accused of man slaughter [thrown in prison and/or you get billed for both your attorney and the State’s too] after they die and the State takes the estate.

    I’m telling you its all changed since the heydays.

    I see all capital gains on the sale of all homes eventually taxed. The governments are broke.

  39. 39

    By softwarengineer @ 38:

    I see all capital gains on the sale of all homes eventually taxed. The governments are broke.

    The main exception is the step up in basis of community property after the death of a spouse. That’s a heck [avoiding Tim’s filter] of a deal, and applies even if the probate estate is not taxed (e.g. where all the property goes to the surviving spouse). If the asset is depreciated, the deprecation will even start over again at the higher value. And when it’s sold the increase in basis is not recaptured.

  40. 40
    Blake says:

    By ray pepper @ 34:

    crap! haven’t been here since Wilson threw the INT in the endzone…I had an infarction and blacked out… its all coming back to me now. Someone get me up to speed…?????!

    RE: ray pepper @ 34
    All you missed Ray…. is the zombie foreclosure apocalypse!!!
    http://www.marketwatch.com/story/zombie-foreclosures-climb-in-la-area-other-major-cities-2015-06-11?siteid=yhoof2

  41. 41

    By kenmorem @ 35:

    RE: scaredy cat @ 33
    here’s my source:
    http://www.financialsamurai.com/tax-free-profits-for-home-sale-250000-500000/

    be sure to read the comments section as well.

    after i came across this article, i forwarded it to my in-laws who were contemplating remodeling one of their rentals while living in it for 2 years to meet the exclusion. he did extensive research on the topic and agreed that the 2 in 5 rule is no more.

    I don’t believe that article is correct. Did you ever consult a real tax professional on that?

  42. 42
    kenmorem says:

    RE: Kary L. Krismer @ 41
    nope. did you?

  43. 43
    Azucar says:

    By softwarengineer @ 29:

    RE: David B. @ 25
    And Ends Suggesting They Owe the IRS Money
    Not selective at all.

    It IS selective because they did not qualify for the capital gains exclusion because they had not lived in the home for two of the past five years… that is the part that you left out. The “exclusion” you are talking about is that you can get an exclusion to the 24 month (residing in the home for a total of any 2 of the past 5 years) requirement for the things that you cite.

    It AMAZES me that you don’t seem to understand the capital gains exclusion…. I mean, you spend a LOT of time in here giving people advice about home buying and selling, and you don’t know that law??? If someone bought the house and lived in it for two of five years, and did not rent it out for income, and they have not sold a different property and taken the exclusion within the two years preceding the sale, then they qualify to exclude up to $250,000 ($500,000 for a married couple) of capital gains from taxation. If they have rented it for any time during their ownership of it, then they need to prorate the amount of time it was used as a business versus and reduce the amount that they can exclude proportionately. I haven’t looked into the law any further than that because I am not in that situation, but before you spout off about how much tax people will have to pay on the capital gains from selling a house you should read up a bit on the actual rules.

  44. 44

    By kenmorem @ 42:

    RE: Kary L. Krismer @ 41
    nope. did you?

    Nope, but I wasn’t advising my in-laws or making other decisions based on the issue.

    I’m not saying that there aren’t any adjustments made if you rented prior to living there, I’m just not sure that article has it correctly described.

  45. 45
    Azucar says:

    By softwarengineer @ 26:

    RE: softwarengineer @ 23

    More on the Capital Gain Exclusion

    Snippet:

    “…Years ago, the IRS charged no tax to homeowners if they sold a primary residence and rolled over the proceeds from the sale into a new home. But that rule is long gone. Based on the information you have included in your question, you will have a sizable gain on the sale of the home and will need to pay taxes on that sale. The good news is that capital gains rates are lower than ordinary income tax rates, but you’ll probably have to pay a good chunk of money to the IRS….”

    http://www.washingtonpost.com/realestate/when-capital-gains-tax-applies-to-primary-residence/2014/04/03/a4f27cee-b602-11e3-8cb6-284052554d74_story.html

    Pay attention to the part that adds a 3.8% surcharge for Medicare….

    Here is another snippet from a different article (even the one that you selectively cut from, when one reads the critical paragraph before the one that you quoted, indicates they have the liability because they did not reside in the home for over 2 years):

    “When you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes.

    “Most people are not going to have a tax obligation unless their gain is huge,” says Bob Trinz, tax consultant at Thomson Reuters.”

    Read more: http://www.bankrate.com/finance/money-guides/home-sale-capital-gains-1.aspx#ixzz3cmePFrt5

    Yes there are some conditions that need to be fulfilled (that most people fulfill easily if they have lived in the house for more than 2 years and haven’t rented it out), and the tax law COULD change… but your initial statement was GROSSLY misleading about the current tax law.

  46. 46

    RE: Azucar @ 43

    This is one of the most argued about provisions of the tax code because it is one of the few that has broad discretion on the part of the IRS to approve or deny the exemption. In some cases the time frame can extend to up to 15 years and clearly past 5 and up to 7. In some cases you can live in the property less than two years and still get at least a partial exemption.

    Unlike most of the code, consulting a professional is sometimes not as important as being honest with yourself, when it comes to this particular provision.

    Remember that the previous provision in the code is that gain on primary residence was exempt if you were continuously a move up buyer until you turned age 65 when you received a one time exemption if you downsized. At some point during my real estate 25 years that changed, I don’t remember exactly when. The powers that be decided that pushing people into higher and higher debt position in order to be exempt from gain tax was not good for the people. They changed the code so that people did not have to keep buying more expensive homes and get into high debt positions or use all of their gains to purchase a new home in order to qualify for the capital gains exemption.

    They considered a much higher number of years than 2 years as primary residence, but instead they added a broad discretion. That is why it is hard to determine exactly what the new provision is, because it is about intent more so than time.

    A young man can buy a condo as his primary residence and then be called to active duty from the national guard and come back 6 years later now married with a child needing a larger primary residence, and still potentially get full exemption even though he only lived in his primary residence for 1 of 7 years.

    An investor can buy a property and move into it as a primary residence for two years and be disqualified from the exemption if his intent to purchase as an investment is somehow clear and public. I warn Erik about this and that he does not use his last name publicly is significant.

    The intent is to shift from primary residence exemption being only if you buy a more expensive home to pretty much all primary residence being exempt…and the “key” is “primary residence” vs the number of years. If primary residence is just being used to get the exemption, and they suspect that and you don’t meet the other proofs besides two year occupancy, you can be disqualified. So moving into your investment property for two years so as to be exempt from the gain tax is and of itself…disqualified…if you are honest about your intent at time of making it your primary residence.

    If someone is forced to sell for various reasons, they will consider a partial exemption even though you did not meet the 2 year requirement.

    If you keep changing your primary residence every two years to the day they can go back and disqualify the exemption or at minimum deny it on the 2nd or 3rd or subsequent try at it.

    There is a lot of discretion in this code and that is why there are so many arguments. If you did not really ever intend for the property to be your primary residence for reasons other than the gain tax exemption…you technically were disqualified the day you moved into the property.

  47. 47

    In other words to ask if you can move into your investment property for 2 years so as to avoid capital gain tax is the same as asking if you can pretend to be legally separated from your spouse so as to collect welfare.

  48. 48
    Erik says:

    RE: Azucar @ 43
    I think you just don’t like mechanical engineers. Swe and I are mechanical engineers and you seem to think you are much smarter. I think swe has mechanical and nuclear. I just went for the masters degree in mechanical.

    You are probably a computer coder aka low level thinker. Am I right? My other guess is you work at a car wash.

  49. 49
    Azucar says:

    RE: Ardell DellaLoggia @ 45

    I agree, if you don’t clearly qualify for the exclsusion there is a lot of grey area that should be CAREFULLY navigated with the help of an expert on the subject – which I most certainly AM NOT! Also, as has been noted the tax laws could change AT ANY time… but I note that they could also change as they relate to 401K’s and IRA’s, so anyone bringing that up as a reason to discount/ignore the capital gains exclusion for primary residences is also BS.

    My specific objections to SWE’s statements were:

    “And using your house equity as an equivalent 401K. The problem is capital gains, you have 3 years to reinvest any equity gain back into real estate or pay income tax on the windfall.” (This characterizes the OLD laws, not the currently available capital gains exclusion. I think that the law changed back in 1997, so he it seems that SWE is a bit out of date.)

    “But the three exclusions, health, unforeseen circumstances and unemployment are exclusions to the capital gains.” (What he mentioned are things that can be cited to get an exemption from the 2 year use requirement to take the capital gains exclusion…. not things that necessarily need to be applicable to take the exclusion at all – unless the “2 year use” requirement is not met.)

    The IRS guidance that I could find on the subject is available at http://www.irs.gov/publications/p523/ar02.html . There is a lot of information on that page and a lot of pitfalls – particularly if you have “complications” like the home not just being a “primary residence”… but most of the articles on the subject that are out there indicate it is not rocket science if you are just talking about selling your primary residence. SWE initially mischaracterized the situation (talking about the old pre-1997 laws as they relate to selling a home and being taxed on capital gains), and then when I pointed out the current status of the laws he tried to obfuscate things by selectively quoting the other article.

  50. 50
    Azucar says:

    By Erik @ 47:

    RE: Azucar @ 43
    I think you just don’t like mechanical engineers. Swe and I are mechanical engineers and you seem to think you are much smarter. I think swe has mechanical and nuclear. I just went for the masters degree in mechanical.

    You are probably a computer coder aka low level thinker. Am I right? My other guess is you work at a car wash.

    I didn’t respond to SWE the way that I did because I “don’t like him”. I responded because he posted a VERY MISLEADING comment, and when I initially pointed it out he selectively quoted from another article to make it seem that he was right… or at least that what I had posted was not correct. So I pointed it out to him.

    With respect to me seeming like I think I’m smarter than you or anyone else, if pointing out instances where people have made misleading statements is “seeming that I think I’m smarter then them”, I guess if the shoe fits I will wear it. But if that person really DID post a misleading or incorrect comment and I posted something that corrected or clarified the situation for people who might have otherwise been mislead by it, I don’t really think it’s a matter of me “thinking” I am smarter than them… don’t you agree?

  51. 51

    RE: Ardell DellaLoggia @ 45 – The really big problem with the old roll over system was that you would end up with a lot of unrecognized gain in your house as you moved from house to house. That would result in significant debt over basis, and if your house was ever foreclosed you’d have a huge tax hit and likely no proceeds of sale. A secondary problem was determining the tax basis in your house could require looking at 30 or 40 years of transactions!

    It was quite some time ago that the system changed–probably at least 20 years. I had a client who came to see me after a foreclosure who missed the changeover by about three months and ended up with something like a $40,000 tax hit.

  52. 52
    Obtusa says:

    RE: Azucar @ 49

    The troll hooked you.

  53. 53
    wreckingbull says:

    RE: Obtusa @ 51 – It’s not so much trolling, but finding an opportunity to tell us all for the 108th time that he has an MS in engineering. The behavior is rather odd – I have never really seen anything like it.

  54. 54
    Saffy The Pook says:

    By wreckingbull @ 52:

    RE: Obtusa @ 51 – It’s not so much trolling, but finding an opportunity to tell us all for the 108th time that he has an MS in engineering. The behavior is rather odd – I have never really seen anything like it.

    Seems to be a combination of massive insecurity and the maturity of a 12 year old.

  55. 55
    Azucar says:

    By Saffy The Pook @ 53:

    By wreckingbull @ 52:

    RE: Obtusa @ 51 – It’s not so much trolling, but finding an opportunity to tell us all for the 108th time that he has an MS in engineering. The behavior is rather odd – I have never really seen anything like it.

    Seems to be a combination of massive insecurity and the maturity of a 12 year old.

    I think you are spot on. I just did a little bit of reading about psychological projection, and as it relates here I think that Erik thinks that I am smarter than him, but his ego won’t let him acknowledge that he thinks it so he projects the feeling onto me… and accuses me of thinking I am smarter than him.

    It may be the first time that I actually agree with him, though!

  56. 56
    greg says:

    responding with insults is perhaps contributing and encouraging poor behavior all around.

  57. 57
    Erik says:

    RE: Obtusa @ 52
    Did the troll hook sugar or did sugar hook the troll?

  58. 58
    Erik says:

    RE: wreckingbull @ 53
    I thought I forced you not only into work retirement, but Seattle bubble retirement. Your back, so I’m forced to run you off again.

    You are still mad because I made $128k right in your face while you constantly told me it wouldn’t happen. You lost. Get over it and go back to retirement.

  59. 59
    Erik says:

    RE: Saffy The Pook @ 54
    What’s your point?

  60. 60
    Erik says:

    RE: Azucar @ 55
    You are flirting with me sugar. It’s obvious.

  61. 61
    Erik says:

    RE: greg @ 56
    Perhaps greg. Perhaps you should say something more interesting or get off my website.

    These computer people all just say the same uninteresting thing. Are you one of them or are you capable of thinking for yourself?

  62. 62
    Mike says:

    By wreckingbull @ 53:

    RE: Obtusa @ 51 – It’s not so much trolling, but finding an opportunity to tell us all for the 108th time that he has an MS in engineering. The behavior is rather odd – I have never really seen anything like it.

    I have. It’s one of the symptoms of NPD.

  63. 63
    Blurtman says:

    RE: Saffy The Pook @ 54 – Trans-12-year-old intolerance.

  64. 64
    Jonness says:

    By ray pepper @ 34:

    crap! haven’t been here since Wilson threw the INT in the endzone…I had an infarction and blacked out… its all coming back to me now. Someone get me up to speed…?????!

    Since you were away, Wilson turned into A-Rod. Your rentals shot up in value, and the Claim Jumper went out of business after a family of 4 $hit themselves to death after eating a batch of 2-year-old grease.

    So you really haven’t missed much! See you at the next Super Bowl. :)

  65. 65
    Jonness says:

    By Erik @ 48:

    RE: Azucar @ 43
    I think you just don’t like mechanical engineers. Swe and I are mechanical engineers and you seem to think you are much smarter. I think swe has mechanical and nuclear. I just went for the masters degree in mechanical.

    You are probably a computer coder aka low level thinker. Am I right? My other guess is you work at a car wash.

    Apparently you prefer to think within the confines of a group and minimize others through stereotypes. Trust me when I tell you I used to have a 34-year-old newspaper boy who is far smarter than you.

    http://chess-db.com/public/pinfo.jsp?id=3012241480

  66. 66
    Azucar says:

    By greg @ 56:

    responding with insults is perhaps contributing and encouraging poor behavior all around.

    It appears that you are correct. Sorry about that everyone.

  67. 67

    Mirroring the open thread, returning to the topic of REAL ESTATE, it is interesting to see the hype of this market. I could easily argue that the market in the really hot areas is not a good market for anyone except sellers and incompetent listing agents. One thing I like that Tim does on his stats is note whether the change is good for buyers or sellers. The hype doesn’t seem to do that at all. They hype is always on, perhaps just changing a little in volume.

    It would be interesting to compare the reporting roundup hype from 2009-2010 to today.

  68. 68
    MD says:

    RE: Kary L. Krismer @ 67 – Just curious, are there specific areas you have in mind that you think are not particularly great for buyers? I’m assuming this includes Cap Hill, Queen Anne, and downtown, but am curious if there are others.

    As someone in tech from the Bay Area, the more residential areas of the city don’t seem particularly crazy to me. Yes they’re expensive compared to the rest of the US, and they have appreciated a lot in the past 4 years. But it seems like there is an influx of techies who want to be in a cute, walkable, central neighborhood, and don’t mind spending up to $800K for that privilege.

  69. 69
    wreckingbull says:

    RE: MD @ 68 – Inventory. Read some of the recent posts about bidding wars and I think ‘crazy’ is the exact term that comes to mind. Even if you are a wealthy techie, you are not having a fun time buying right now.

  70. 70
    Mike says:

    By wreckingbull @ 69:

    RE: MD @ 68 – Inventory. Read some of the recent posts about bidding wars and I think ‘crazy’ is the exact term that comes to mind. Even if you are a wealthy techie, you are not having a fun time buying right now.

    This will be interesting to watch – a couple we’re friends with just decided to sell their home (super hot neighborhood) and move into a temporary rental while looking for a new house to buy. When I heard about this plan my only reaction was … “Oh, um… best of luck?” I hope they get settled in, but it seems like a very risky move in this market.

  71. 71

    RE: MD @ 68 – There are few places within the city limits of Seattle which are even okay for buyers–particularly north Seattle. I haven’t been looking doing a broad search recently on the eastside north of I-90, but I’d assume there are parts of that area which are not good either.

  72. 72

    RE: Mike @ 70 – Hopefully they have a good buyer’s agent. It’s hard to win a bidding war when your agent doesn’t have a clue.

    But more importantly, hopefully they can be somewhat patient, or at least more patient than whoever buys their place! They want their sale to be a more frantic bidding war than their purchase. ;-)

  73. 73
    Deerhawke says:

    Mike, we have some acquaintances in the same situation. With another kid on the way, they decided they needed a bigger place. They looked at remodeling, but decided that it would be too stressful. They looked at buying something before they sold using a bridge loan, but decided it would be too stressful. So they put their house on the market and it got 6 offers and sold for 7% over asking price in less than a week. Hooray!

    But now, even with a negotiated rent-free 90 day closing, they have not been able to buy anything. They have been on the other side of the wild and crazy bidding wars. They are now having to move into a rental and it is farther from work and nearly as expensive than their last mortgage payment. Talk about seller’s remorse. Talk about stressful.

    That is the nature of this market. Kind of like this bit from Dr. Suess’s On Beyond Zebra (1955)

    And NUH is the letter I use to spell Nutches
    Who live in small caves, known as Nitches, for hutches.
    These Nutches have troubles, the biggest of which is
    The fact there are many more Nutches than Nitches.

    Each Nutch in a Nitch knows that some other Nutch
    Would like to move into his Nitch very much.
    So each Nutch in a Nitch has to watch that small Nitch
    Or Nutches who haven’t got Nitches will snitch.

  74. 74
    Mike says:

    By Kary L. Krismer @ 72:

    RE: Mike @ 70 – Hopefully they have a good buyer’s agent. It’s hard to win a bidding war when your agent doesn’t have a clue.

    But more importantly, hopefully they can be somewhat patient, or at least more patient than whoever buys their place! They want their sale to be a more frantic bidding war than their purchase. ;-)

    Patient? Baby is due this fall…

  75. 75
    Erik says:

    RE: Jonness @ 65
    I was being my troll self for fun. I really don’t think I’m going to win a genius award anytime soon.

  76. 76

    By Mike @ 74:

    By Kary L. Krismer @ 72:

    RE: Mike @ 70 – Hopefully they have a good buyer’s agent. It’s hard to win a bidding war when your agent doesn’t have a clue.

    But more importantly, hopefully they can be somewhat patient, or at least more patient than whoever buys their place! They want their sale to be a more frantic bidding war than their purchase. ;-)

    Patient? Baby is due this fall…

    Oh, well they’re fine then. The mother’s nesting instincts will take over, the sellers of the perfect house will be physically threatened, and your friends will win out in any bidding war offering only list price and 10% down. ;-)

  77. 77
    MD says:

    Apparently, there’s an 18 year housing cycle: http://www.dce.harvard.edu/professional/blog/how-use-real-estate-trends-predict-next-housing-bubble

    Looks like we’re into the expansion phase at the moment, and probably will be for the next several years. We’ll probably have to wait until the early 2020’s for another major real estate correction like we saw in 2008.

    Of course, past performance is not a guarantee of future results. Nonetheless, depending on your time horizon for owning a house, this is an interesting theory.

  78. 78

    RE: MD @ 77 – I’m not even going to bother looking at that, because it’s nonsense. Seattle was rather unusual having gone some 20 years in a row without a decline in the median. In many other parts of the country, at different points in time, they had serious declines in housing values during that same time frame. You saw many of the same things there that we saw here, with high levels of foreclosures, properties being difficult to sell, and property owners being underwater.

    But you don’t even need to get into that much of an analysis. Any attempt to predict the future based on the past is prone to failure.

  79. 79
    Ray pepper says:

    RE: Blake @ 40 – Thanks Blake!! Yes, I see many of those in the 98349 and various areas around it

  80. 80
    Jonness says:

    By Erik @ 75:

    RE: Jonness @ 65
    I was being my troll self for fun. I really don’t think I’m going to win a genius award anytime soon.

    Yeah, I know, but that Bruce Moon guy was really something else. He would walk through town with a newspaper bag full of papers and deliver them door-to-door. By all outward appearances, the guy was a complete loser.

    Then sometimes I would read in the newspaper he played chess at a tournament against 12 different opponents in 12 different games (simultaneously), and he was blindfolded, and they weren’t. First, I would wonder, who sets this kind of thing up, and how do they get his opponents to agree to play against him? Then I would think, why on earth doesn’t this guy go to school and get an education instead of surviving on a paper route?

  81. 81
    Jonness says:

    By MD @ 77:

    Nonetheless, depending on your time horizon for owning a house, this is an interesting theory.

    That was a super fun article. Thanks for the link!

  82. 82
    Azucar says:

    By MD @ 77:

    Apparently, there’s an 18 year housing cycle: http://www.dce.harvard.edu/professional/blog/how-use-real-estate-trends-predict-next-housing-bubble

    Looks like we’re into the expansion phase at the moment, and probably will be for the next several years. We’ll probably have to wait until the early 2020’s for another major real estate correction like we saw in 2008.

    Of course, past performance is not a guarantee of future results. Nonetheless, depending on your time horizon for owning a house, this is an interesting theory.

    The article explained the theory pretty well, but the data doesn’t really support their premise about it being an 18 year cycle… the last 4 intervals were 17, 10, 6, and 48 years. That does NOT suggest that there is an 18 year cycle. The previous data is pretty consistent with an 18 year cycle (data leading up to 1925), but things have changed so much since 1925 it’s not really relevant, IMO.

    If we were to consider either the 6 year or 10 year cycles, which are two of the more recent ones (and thus would be more predictive of the current state of things than the corresponding data from 1925), as indicators, their conclusion that the market won’t have a downturn until 2024 doesn’t make sense… we are already due if it is a cycle like the one that ended in 1979, or the crash will come in the next year or two if we’re like the one that ended in 1989.

    Basically, I think their overall theory is interesting, but the interval/timeline that they assigned to it seems like hogwash to me.

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