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About to make 800k in capital gains, trying to decide how to protect it.

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MitchM

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So I made a post a little while back in the relationships forum about how my mother was broke and needed to sell her house. To all of the folks who read that and responded, I would like to thank you because it really helped me put my head on my shoulders. And now, thankfully, it looks like someone will be buying the house for the full 2 million dollars, although nothing is in stone yet.

Originally my parents put $1.2 million into the house, so my mom will actually have about 800k in capital gains with the next 250k being exempt from taxes because she has lived there for more than two years. There is a potential that at the time it sells my step-father will also have been living at our house for two years by then - so that might be another 250k exempt from taxes, but this is unlikely.

Before I get into the rest, please keep in mind that I just turned 21 and am very inexperienced, so I am doing the best that I can to wrap my mind around the situation and figure out the best steps to move forward.
Also, right now she owes a little less than $1 mil on the house.

The situation is looking like (and correct me if I am wrong):

  • Sell house for two million
  • First 200k not taxable because not a profit (originally put $1.2 mil into the house)
  • First 250k of capital gains is not taxable
  • That leaves 650k taxable, which I am guessing is subject to the usual 39.6 percent + Georgia's 6% - it comes out to about 260k total taxes
  • Subtract 6% from the total cost of $2 mil for the realtor (I think) and you get another 120k

After all is said and done she would lose about 380k out of the million she keeps. Leaving her with 620k to spend.
(I'm not certain that these numbers are right, so let me know if I misunderstood something)


This is the hard part: My mother is TERRIBLE with money, so I am trying to help her find the most financially secure route she can take until she can get on her feet. And when I say terrible with money, I mean that she practically burns it.

At 21 years old, it is extremely stressful to constantly be alleviating the financial burdens of your own mother (I have spent over 40k helping her), and now is a time in my life where I am only trying to be responsible for myself so that I may help others in the future.

She will probably go back to school for a short time to become a chiropractor again btw, so it's not like she'll have no income (I hope).

Without getting sidetracked too much - how would you go about protecting this money? She wants to buy an expensive place downtown and I keep telling her that she needs to have enough money to live off for a while until she actually has income. She has literally been looking at places that cost more than the total amount that she is going to profit, but I don't think she understands this.

Should she rent a place? Should she buy? Should she invest? I have no idea and I am sorry if I haven't done an effective job at laying out the situation. Thank you for any help!
 

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Marquin Brewer

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So I made a post a little while back in the relationships forum about how my mother was broke and needed to sell her house. To all of the folks who read that and responded, I would like to thank you because it really helped me put my head on my shoulders. And now, thankfully, it looks like someone will be buying the house for the full 2 million dollars, although nothing is in stone yet.

Originally my parents put $1.2 million into the house, so my mom will actually have about 800k in capital gains with the next 250k being exempt from taxes because she has lived there for more than two years. There is a potential that at the time it sells my step-father will also have been living at our house for two years by then - so that might be another 250k exempt from taxes, but this is unlikely.

Before I get into the rest, please keep in mind that I just turned 21 and am very inexperienced, so I am doing the best that I can to wrap my mind around the situation and figure out the best steps to move forward.
Also, right now she owes a little less than $1 mil on the house.

The situation is looking like (and correct me if I am wrong):

  • Sell house for two million
  • First 200k not taxable because not a profit (originally put $1.2 mil into the house)
  • First 250k of capital gains is not taxable
  • That leaves 650k taxable, which I am guessing is subject to the usual 39.6 percent + Georgia's 6% - it comes out to about 260k total taxes
  • Subtract 6% from the total cost of $2 mil for the realtor (I think) and you get another 120k

After all is said and done she would lose about 380k out of the million she keeps. Leaving her with 620k to spend.
(I'm not certain that these numbers are right, so let me know if I misunderstood something)


This is the hard part: My mother is TERRIBLE with money, so I am trying to help her find the most financially secure route she can take until she can get on her feet. And when I say terrible with money, I mean that she practically burns it.

At 21 years old, it is extremely stressful to constantly be alleviating the financial burdens of your own mother (I have spent over 40k helping her), and now is a time in my life where I am only trying to be responsible for myself so that I may help others in the future.

She will probably go back to school for a short time to become a chiropractor again btw, so it's not like she'll have no income (I hope).

Without getting sidetracked too much - how would you go about protecting this money? She wants to buy an expensive place downtown and I keep telling her that she needs to have enough money to live off for a while until she actually has income. She has literally been looking at places that cost more than the total amount that she is going to profit, but I don't think she understands this.

Should she rent a place? Should she buy? Should she invest? I have no idea and I am sorry if I haven't done an effective job at laying out the situation. Thank you for any help!

Hi Sterlock, I will give an opinion and its just that my opinion. If I were in your shoes I would continue to try to persuade my mother and step-father to make no hasty moves if the sales is completed.
One problem I see is when someone doesn't have a financial IQ they will blow through big money as well as with little money.
Also, it sounds like your mother is already planning that she is in the customer life cycle and she is in the last phase ( the money is already spent in her mind) it may be very difficult to change it but you have to try.
I would introduce them to some of the things your learning here about money and business or maybe a very competent advisor on investing....but here's a problem with that is if your not financially savvy and don't know about investing the advisor can steer you wrong because your unaware of such things.
Gain some knowledge on investing so you can steer your mother in a good healthy direction otherwise she will blow her money and this opportunity.
 

Scot

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I'm not an expert im real estate but I know there's a special tax exemption if you use the profit of a sale to buy more expensive real estate.

So, if they sell the house and then use that money to invest in some rental property it's a source of passive income and you don't pay tax.
 

Pete799p

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I'm not an expert im real estate but I know there's a special tax exemption if you use the profit of a sale to buy more expensive real estate.
So, if they sell the house and then use that money to invest in some rental property it's a source of passive income and you don't pay tax.

Note: The Following does not constitute tax advise and you should always consult a licensed accountant.

In the US this is often refereed to as a 1031 exchange. Not 100% sure of the rules in your situation as all my experience with these have been investors trading one investment property for another but if you want to continue to be invested in real estate you should explore this with your accountant.

If it is feasible you will need to set up a 1031 intermediary to hold your money before you close. If you take possession of your money after closing you will no longer be able to exchange.

You will have 45 days to identify up to 3 properties and 120 days to close.

Whether or not exchanging is actually a good idea is whole other topic.
 

biophase

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Sale on the house is $2M, proceeds will be $1,880,000.
Profit $1,880,000 - $1,200,000 = $680,000
First $250,000 exempt in taxes
Second $250,000 maybe exempt in taxes
Remaining $180,000 taxed at 15 or 20% capital gains rate (not income rate)

If your father in law can qualify for the second $250k exemption in a few months, I would try to delay closing so that he does. You are talking about saving $37500 to $50000 by merely waiting a month or two.

The question on what to do with the $680,000. I'm not sure. But I would probably do something where they can only touch $100,000/yr for the next 6 years. You have to do something that limits access to it all. I'm not sure how you would structure that. But the big question is would they even agree to something like that?
 

ravenspear

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which I am guessing is subject to the usual 39.6 percent

Was already pointed out but this is incorrect. 39.6% is the top INCOME tax rate not capital gains rate. If you are in the 39.6 income tax bracket then your capital gains bracket is 20%.
 

MitchM

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Sale on the house is $2M, proceeds will be $1,880,000.
Profit $1,880,000 - $1,200,000 = $680,000
First $250,000 exempt in taxes
Second $250,000 maybe exempt in taxes
Remaining $180,000 taxed at 15 or 20% capital gains rate (not income rate)

If your father in law can qualify for the second $250k exemption in a few months, I would try to delay closing so that he does. You are talking about saving $37500 to $50000 by merely waiting a month or two.

The question on what to do with the $680,000. I'm not sure. But I would probably do something where they can only touch $100,000/yr for the next 6 years. You have to do something that limits access to it all. I'm not sure how you would structure that. But the big question is would they even agree to something like that?

Thanks for breaking that down. I don't think my mother would agree with having her access to the funds restricted, so I am thinking that real estate may be a good way to tie some of it up.
 

NYCGoblin

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Note: The Following does not constitute tax advise and you should always consult a licensed accountant.

In the US this is often refereed to as a 1031 exchange. Not 100% sure of the rules in your situation as all my experience with these have been investors trading one investment property for another but if you want to continue to be invested in real estate you should explore this with your accountant.

If it is feasible you will need to set up a 1031 intermediary to hold your money before you close. If you take possession of your money after closing you will no longer be able to exchange.

You will have 45 days to identify up to 3 properties and 120 days to close.

Whether or not exchanging is actually a good idea is whole other topic.
You can't do a 1031 exchange on a primariy residence it would have to had been used for investment purposes for 2 years.

TS does your mother & step father have other forms of income/savings? If so as bio mentioned you should restrict access (Hopefully it's not difficult for them to take advice from you) If they don't need the money then investing in a few real estate properties could be viable. I'd duggest you speak to the broker that you are using & see what they think about some investments that might make sense for you in that market. Although I definitely wouldn't allocate all of that money to real estate.

Good luck
 

biophase

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Thanks for breaking that down. I don't think my mother would agree with having her access to the funds restricted, so I am thinking that real estate may be a good way to tie some of it up.

How about purchasing 3 homes for $200k cash and living in one, renting the other two out.
 

KLaw

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Sale on the house is $2M, proceeds will be $1,880,000.
Profit $1,880,000 - $1,200,000 = $680,000
First $250,000 exempt in taxes
Second $250,000 maybe exempt in taxes
Remaining $180,000 taxed at 15 or 20% capital gains rate (not income rate)

If your father in law can qualify for the second $250k exemption in a few months, I would try to delay closing so that he does. You are talking about saving $37500 to $50000 by merely waiting a month or two.

The question on what to do with the $680,000. I'm not sure. But I would probably do something where they can only touch $100,000/yr for the next 6 years. You have to do something that limits access to it all. I'm not sure how you would structure that. But the big question is would they even agree to something like that?
You all are such suckers...Reread the OP. Duh.
 

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