Some well-heeled homeowners are reportedly scrambling to offload luxury properties by the end of the year or else risk having a serious bite taken out of their bottom lines. That's because if the Bush-era capital-gains tax cuts expire in January, as they are expected to, those homeowners would be shelling out a lot more on sales.
Patty Lance, a Realtor at Coldwell Banker Previews International who handles listings in Newport Beach, Calif., said there's such a rush to sell among silver spooners that she's decided to target them by hosting webinars on the tax hike's effect on home sales.
"Sophisticated investors are looking at this, saying, 'Maybe we need to focus on this right now and time it with the market heating up,'" she said in explaining the reason for her Web seminars. "They are starting to feel that they need to do something in the third quarter, fourth quarter [of 2012] and jump on this."
And it seems that homeowners in the high-end market might already be doing that. Average sales of homes priced at $1 million or more are up 23 percent from a year ago, according to online listing service RealtyTrac. Also, the company said that the average sales price in the million-plus category -- at $2,067,157 in May -- had dropped 12 percent from last year. That could be a sign that sellers are becoming more willing to accept lower offers.
Meanwhile, median home prices increased year-over-year by 2 percent in May 2012 compared to the same period last year, CoreLogic reported.
...the possibility of the tax increase creates quite the incentive for high-end homeowners to sell before the new year.
- Vijay J. Marolia, Private Wealth Management
'We're Telling Them to Take the Profits Right Now'
Currently, an individual who makes a profit of $250,000 or more on the sale of his or her primary residence ($500,000 or more for a married couple) must pay a 15 percent tax on that profit (minus deductions including renovation costs and closing costs).
But if the Bush-era capital-gains tax cuts expire, the tax rate on such proceeds will jump to 20 percent. Plus, starting in 2013, individuals who make at least $200,000 in income (or married couples making at least $250,000) will have to pay an additional 3.8 percent health-care tax on capital gains. The legislation is set to go into effect in 2013.
In all, the tax hikes stand to bring the cumulative tax rate on gains from luxury-home sales up by 8.8 percent to 23.8 percent. To be sure, the expiration of the capital-gains tax cuts is by no means a done deal: Presumptive Republican presidential nominee Mitt Romney has vowed to extend them. And the House of Representatives -- with mostly Republican support -- voted Friday to extend them for one year, despite opposition from the Senate and President Barack Obama.
But the possibility of the tax increase creates quite the incentive for high-end homeowners to sell before the new year, said Vijay J. Marolia, chief investment officer at Private Wealth Management.
"We're telling them to take the profits right now," he said of his high-net-worth clients. "We really feel strongly that taxes are going to go up in the future. The government needs revenues." Marolia, like Lance, advises clients in the luxury home market.
One of Lance's clients is a couple who originally bought their home for about $100,000, she said. But after renovations and price appreciation, it's now worth about $9 million. After deductions, including renovations and closing costs, the couple would get taxed on about $5 million if the home sells for its asking price, she said.
If the capital-gains tax cuts expire and they sell next year, the couple would have to fork over about $1.19 million to Uncle Sam. But if they sell this year, they'll only have to pay around $750,000. That would amount to a savings of about $440,000 for the couple.
'Sellers Are More Motivated to Listen'
Due to the potential for such savings, "sellers are more motivated to listen and work with an option," and negotiate with potential buyers, said Frances Katzen, a Realtor at Prudential Douglas Elliman Real Estate, who moves swanky residences in New York City.
Katzen recently closed a $10 million sale in which she said the expected tax increase was "an impacting driver" in her clients' mentalities as sellers. She also said that she's currently working with one person, a bigwig at JPMorgan Chase, who also wants to beat the possible tax increase.
The trend could potentially deal a blow to the housing market, as it did in 2010 when affluent homeowners were worried that Congress would raise the capital gains tax. At the time, sellers flooded the high-end market with supply, pushing down home prices, CNBC.com reported.
Marolia said that he expects the supply of luxury homes to increase partly because of the pending tax increases, but even more so because of the growing perception that home prices are on the upswing. He said that should coax more homeowners to put their homes up for sale.
Other experts have said that the luxury market has reached a crossroads, where sellers who previously withheld their homes from the market in the hope that prices would rise have now given up on substantial appreciation.
So far this year, the supply of $1 million-plus homes has increased 15.7 percent, RealtyTrac reported.
However, both Lance and Katzen said there's more than enough demand to offset any downward pressure on prices created by swelling inventory.
"We have so many buyers sitting on the fencepost right now," Lance said.
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