Pair want to preserve equity gain

Q:My husband is three years away from retirement. At that time we plan on moving out of the area.

A year ago, we purchased a house in Stafford County for $435,000. Our real estate agent tells us we could sell today for $575,000, which is a great profit in only one year. She also believes that the house will drop in value by as much as $50,000 in 2005 because interest rates will be higher and the presidential election will be over.

We were thinking of selling this house now, taking the profit, paying the capital-gains tax and buying another retirement home where we want to relocate (at a much cheaper cost) — and buying another property here so we can have the same tax write-off. In three years, we would sell the property here and move into our retirement home.

I know it’s impossible to predict the market, but I thought you would have better insight than we do. Thanks in advance.

A: Let me try to dissect your situation.

First, thanks to the red-hot market, you have made a ton of equity in your home in Stafford County that you purchased only a year ago.

Second, you are fearing a market turnaround and are considering selling your property and taking the profit.

Third, if you sell your home, you would pay the capital-gains tax, buy a retirement home out of the area and buy another home here until your husband’s retirement.

Fourth, you plan on moving out of the area in three years, upon your husband’s retirement.

Let me give you my thoughts. As I have stated previously, the real estate market in the Washington area is out of control.

As in any kind of market, the chance of a correction is always present after a period of rising values.

Folks such as you who have reaped huge rewards over a short period need to carefully examine their situation before selling. I’m not sure the strategy that you suggest is wise.

First of all, selling a home just because your real estate agent is predicting a $50,000 drop in value is, frankly, not enough reason to sell. She could be dead wrong in her prediction.

However, if she’s right, it suggests that, indeed, the market has peaked, which would make buying another home in this area a risky move, as that property might drop in value at the same time.

I think the basic question you have is this: How do we preserve this windfall of equity for the next three years when we are ready to move out and retire?

My advice is to consult a tax accountant. I don’t know all the rules specifically, but I do know that capital-gains tax obligation could be eliminated after residing in the property for two years.

A tax accountant can tell you what your tax obligation will be, based on any given time and price. You may find that even if your real estate agent is correct in her prediction, selling early may result in a tax obligation that would exceed a predicted value decline.

Your accountant can run the numbers and tell you exactly how much your property must decline in value in order for it to make sense to sell now and pay a hefty tax bill.

My guess is that he will tell you to hold.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).