Can Real Estate Fall Off the Fiscal Cliff?

At the end of this year, Congress and the President will collectively be like a college kid who blows off class all semester and then has to cram all night long to study for an exam he needs to pass to graduate. If they do not collectively act, automatic tax increases and spending cuts will kick in, likely driving our fragile economy back into recession. This is what the media and economists are calling the "Fiscal Cliff" - a major shock to our system. We are in this mess largely because the Bush administration spent money like a drunken sailor when times were good, and the Obama administration has been spending money like a drunken sailor with a stolen credit card when times are bad. No one will do anything until after the election and they will cram through a compromise at the last minute, but we will not know the result until the very end of 2012.

If you are tax planning as to when to sell your investments, the wait is maddening. At least with stocks, you can sell with the click of a button on the last day of the year if that is what you choose to do. There is no such luxury with real estate, you need to plan well in advance, and our elected officials in Washington will not be giving you anywhere near enough time to do that this year.

The first question to ask yourself is do you need to sell.  The market is still relatively flat and prices have dropped off considerably in the last few years so generally speaking, it is not a great time to sell. If you need or want to sell and you purchased your property in the last decade, you will probably be selling at a loss, so there may be no taxable gain anyway.  But if you have a property where you may have a sizeable taxable gain due upon sale and you know you are going to need or want to sell it in the near future, the time to act is now.

Selling real estate in this market has its challenges and even if you list your property at a good price today, there is no guaranty you will find a buyer and close by the end of the year. However, if you wait until fall it may not be possible to find a buyer to close at the right price by the end of the year. Listing a property is easy and a good broker can advise you of the best price point at which to sell, but even if a buyer is found, the contract will need to be negotiated and finalized, searches and inspections will need to be done and financing arrangements will need to be made.  In case you have not heard, financing is not as easy to get these days as it used to be 5 or 6 years ago. Underwriting standards are much more stringent, and appraisers are much more conservative with their estimates of value. From the date of this post there is a little over 5 months left of 2012, so if you think you need or want to sell then you have to be proactive or the decision will be made for you.

Of course, if all goes the Republicans' way in November, tax increases are highly unlikely. If all goes the Democrats' way and you are in line for substantial taxable income in 2013, expect to pay significantly higher taxes. The more likely scenario is split control of the government and some form of tax increases on capital gains and income taxes on “wealthy” individuals – however that winds up being defined. Unless you have a crystal ball, you do not know what the result will be. But if you need to sell, be like the kid who went to class every day, and regardless of the outcome in Washington, you can pass the exam and graduate.