It’s interesting to go on listing appointments these days and to see the motivations of sellers who are looking to sell and what is driving their decision.
We met a seller this week who is an entrepreneur with a lucrative day job. His income funds his second business, which is buying distressed real estate that he rehabilitates, rents, and holds. In the past few years he has purchased and restored 11 properties, which make up his impressive real estate portfolio. David’s strategy has always been to refinance each property after construction, pull out the equity, rent the property out to tenants, and use the proceeds from the refinance to buy the next property in his portfolio. As property values and interest rates both went up, the strategy of his past no longer works for him now. To shift with the market and the interest rates, David decided to sell the current property in order to pull money out and invest in the next one in a more conservative adapted approach.
Most interesting is a seller who is motivated to sell his property in order to gift all the proceeds from the sale of his property to his kids, in order to preemptively save 40% on future estate taxes. His deadline to sell is the end of 2025 for the 40% tax savings.
The Tax Cuts and Jobs Act of 2017 (TCJA) is the unofficial name for the large set of changes to the Revenue Code of 1986, signed into law by President Trump in 2017. TCJA made many large changes across multiple areas of the tax code, including most infamously reducing the corporate tax rate, increasing the standard deduction, and increasing the applicable exclusion amounts for estate taxes. Only some of the TCJA changes were permanent, and over twenty provisions will expire by the end of 2025. The TCJA doubled the estate tax exclusion to $11.2 million per person in 2018. This exemption amount is adjusted annually for inflation and currently sits at $12.06 million for 2022 and will increase to $12.92 million for 2023. However, after December 31, 2025, this exclusion will revert to the $5.49 million per person used before 2018, adjusted for inflation.
Once 2026 arrives, many of the tax adjustments that were part of the 2017 Tax Cuts and Jobs Act (TCJA) are expected to expire. For wealthy couples, the most impactful change could be a significant reduction in the estate tax exemption, which in 2022 currently stands at $12.06 million per person (or $24.12 million per couple). Based on current law, these higher exemption amounts will revert to the 2010 level of $5 million, adjusted for inflation, or roughly $6.4 million ($12.8 million per couple) in 2026 – about half of what it is today – with a federal tax rate on estates over these exemption amounts of 40%, plus state death taxes if you reside in a state that has one.
It would take an act of Congress to avoid the expiration of the high exemptions at the end of 2025. And considering record levels of national debt and aggressive government spending priorities, it’s reasonable to believe that raising revenue through taxes could be a priority over the coming years. For these reasons, until the end of 2025, there is a tremendous opportunity to lock in today’s all-time high lifetime (gift and) estate tax exemption levels to help minimize federal estate taxes and maximize what they can leave to their heirs. This seller’s plan is to take advantage of the current high lifetime (gift and) estate tax exemption levels and gift property to his kids over the next 3 years to save his heirs on estate taxes after he dies.
When I met the seller at 244 N Rossmore in September of last year, he wished to sell his house before Measure ULA kicked in, which added an increased transfer tax of 4% on the sales price of his home. We met in September before the elections that voted in Measure ULA, in anticipation of the increased tax being approved. The motivation to sell was the anticipated new tax law. The sale of 244 Rossmore is set to close on March 31, the last day before Measure ULA kicks in on April 1, 2023. It is truly an honor to work with this seller and his home and to get the job done – just in the nick of time!
I got an email last Saturday from a seller who bought a YSL bag and by mistake had it shipped to her old house that we sold in 2020. Liz now lives in Virginia. She was notified that her bag was delivered, she figured out it was to her old address, and she worried that she made a costly mistake. On Saturday night, I texted Alexis Kim, the cooperating agent who represented the buyer on the sale 2.5 years ago. I jumped in my car and drove to the home, where the kind buyer handed me Liz’s newly delivered package along with a book and an eyeliner that came for her in the past too. Seth went to the post office and sent Liz all her things right away and I so appreciated how kind both Alexis and her client were to care about Liz and her stuff. I love when people are nice!
I’m feeling all the feelings as Passover approaches next week. Every year holiday time is when I miss my Mom the most. By 10 days before Passover, my Mom’s freezer was overstuffed with vats of chicken soup, piles of blintzes, perfectly mounded chocolate chip cookies, decadent Swiss chocolate cakes with fresh roasted candied nuts, Hungarian Paprikash chicken and Saucy Brisket for the Seder, potato kugels, spongey light nut cake popped out of the springform pan, and all kinds of preserved fruit compotes. If I close my eyes, I can take myself right back to standing beside my Mom in the kitchen and cooking all the delicacies along with her. I’m feeling especially blessed and so looking forward to marathon cooking sessions with my girls this week, recreating every one of my Mom’s Passover delicacies. Sadly Mom isn’t physically here with us, but she’s definitely here in spirit; we even detailed the dining room chandelier this week just the way Mom did it for the holiday!
Wishing everyone a glorious week ahead!