4 Money Moves To Make When Your House Is Worth a Million Dollars
Let’s say you bought a home a few years ago and its value has shot up, reaching the nice, round and comforting number of $1 million.
While this feat can push some homeowners to jump on the occasion, make a rash decision and sell, experts warn that there are many factors to consider.
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“One million dollars is a large, round number that sets off triggers in our minds, but there’s far more that should be considered,” said Peter C. Earle, economist at American Institute for Economic Research. “A home sale should be compatible with future housing needs and undertaken with a person or family’s present financial stability, current market conditions, tax implications and long-term goals considered.”
Indeed, the current housing market is a difficult one for both homebuyers and owners. The combination of high prices, low inventory partly due to homeowners who’d rather stay put due to the low mortgages they secured a few years ago and exploding mortgage rates have left many homebuyers on the sidelines.
Against this backdrop, here are some moves experts say you should consider when your house’s value reaches $1 million.
Also see what a $1 million home looks like around the United States.
Beware the Gap Between Value and Realized Sale Price
According to Earle, homeowners with houses valued at $1 million also should be careful about the potential for slippage between estimates and realized sale prices.
In addition, he said a home that reaches $1 million in value could very well keep rising.
“It may be that holding onto such an asset as a long-term investment is the better play,” he said. “A financial professional can help chart that path.”
Understand the Market Dynamics
According to experts, this is crucial.
“You need to get a pulse on the current real estate market. Is it hot, with buyers scrambling over each other to make offers? Or is it cool, with homes sitting a little longer on the market?” said Jeff Rose, CFP and founder of Good Financial Cents.
This isn’t just about the national trends, he said. It’s super local, he added, noting that what’s happening in your neighborhood, or even on your street, can be totally different from the city overall.
“If it’s a seller’s market and you’re considering a change,” Rose said, “it might be the perfect time to cash in. But if it’s slow, hanging tight might be your best bet.”
Understand the Tax Implications — Capital Gains and Beyond
This is another biggie, according to Rose, and if you’re thinking about selling, you need to understand how capital gains work.
“If you’ve lived in your house for at least two of the past five years in the U.S.,” he said, “you can exclude up to $250,000 of the profit from tax if you’re single or $500,000 if you’re married filing jointly.”
Yet, there’s a kicker: Any profit over that is subject to capital gains tax.
“So, if you sell your million-dollar home and make a huge profit, a chunk of that might go to taxes,” he said. “It’s essential to crunch these numbers, maybe with a tax pro, to see what your take-home would be after Uncle Sam takes his share.”
Leverage Equity Smartly
If you’re not selling, think about what that equity can do for you. It’s like having a gold mine under your house — you can tap into it. Refinancing to a lower interest rate could save you a bundle over time, Rose said.
Other experts agree, saying that “if you do not need to sell, do not sell. Harness the power of that equity.”
For instance, Michelle Mumoli, broker-salesperson at Compass, said you could take a home equity line of credit (HELOC) to use for a down payment on another investment.
“Equity is key to generational wealth,” she said. “When you give away its power, you lose wealth-making opportunities.”
Another factor to consider is that interest on HELOCs is deductible if the borrowed funds are used to buy, build or substantially improve the taxpayer’s home that secures the loan, according to the Internal Revenue Service.
Your first $100,000 of home-equity debt allows you to fully deduct your interest-only payments on taxes as long as your total home-related debt does not exceed $750,000, explained Avis Berg, CIO at Berg Capital.
“So with that $100,000 that you’ve already received from appreciation of your home, you can improve the property further as long as it does not financially hinder you from making payments,” Berg said. “You can tap into the $100,000 and invest it into more rooms, renovating your property and enhancing its value.”
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