To sell or not to sell?

[mamasaurus]

I would love input on this decision, thank you!

We bought a home in 2001 with a 15 year fixed mortgage. We refinanced in 2003 which added two years to the mortgage, so we have 8 years to go.

We are in our mid-40s and are thinking about how to fund retirement. We have a good chunk of money in a 401(K). We have our own business which is a corporation, so we are able to fund the retirement account from that business with pre-tax dollars. That is a good thing.

We had also been viewing our home as a retirement investment. We bought it for a very good price in 2001, well under market value. It has increased 30% since then. If we hang onto it for another 15-20 years, we could sell it for a very good price and help fund our retirement.

However, in order to pay the mortgage, we have to pay ourselves salary from our business, which then means we have to pay payroll taxes. The payroll taxes are such a massive amount. To give you some real figures - our monthly mortgage is $4500. Our business rents space in our home for a home office, and pays us $1600/month for that space. So that money is pre-tax dollars, paid directly from the corporation to us as rent. The remaining $2900/month has to come to us as salary through our business. In order to get $2900, we have to pay ourselves $4500. Payroll taxes are $2000, and then we get a payroll check of $2900 to pay the remaining portion of the mortgage. I hope that made sense.

This is SOOOO frustrating!!! To have to pay $2000 in payroll taxes each month, just to pay the mortgage. I have talked to our accountant about any other legal ways to avoid this, but of course there are none.

I'm to the point of saying let's just sell this house, pay off the mortgage and move to a smaller home with no mortgage, and then start taking all that money that would have gone to payroll taxes and put it in the retirement account(s).

I'm concerned that I'm missing something here, however... Does anyone see anything else that I should be considering?

Thank you!

[SleeplessMommy]

smaller house = lower utility payments

would the smaller house still have a home office?
can you increase the area being used for the home office and "raise the rent"?
do you love the home? like the area?
do your clients come to the home office? good parking?
will a "for sale" sign make your clients worry?

I would have some good talks with real estate agents and your accountant. you loose 7% to selling costs, keep that in mind.

[mamasaurus]

Thanks for responding!!!

As far as loving the home - I'm really trying to keep my emotions out of it. Our oldest girl was born in this house, so yes, I could get very attached to it. However, I am trying to be practical as well.

The stress of having to come up with the $4500/month for the mortgage is a factor as well. That is $54,000/year JUST for the mortgage. Our living expenses are on top of that and it is starting to wear on us. Our income fluctuates each year because of our self-employment situation. Stress is a big factor here.

Smaller home could still have a workspace - DH is fine with a rustic space - he is an artist and is fine with a shed and concrete floor. I need a cleaner space for my work, however.

I'm starting to look at homes in the area to see what we could get. The goal would be to have no mortgage at all, so I have to see what we could realistically get.

I have a real estate agent coming over today to take a look at our place and give us an idea of what it is worth in this market.

[mamasaurus]

Part of the equation is this: if we are spending $54,000/year for a mortgage and viewing that as "retirement investment", would we be better off having no mortgage and taking the $54,000/year and putting it into a 401(K) somewhere safe (no stocks, for example).

How can we figure out what is the better long-term investment? Real estate... or cash?

I guess we have to figure out what we think our home would be worth in 15 years?

[Selesai]

I guess I don't understand. How can you legally avoid payroll taxes if you don't have a mortgage? Won't you have to pay payroll taxes on any money that you are paying yourself as salary?

[SleeplessMommy]

Originally Posted by Selesai

I guess I don't understand. How can you legally avoid payroll taxes if you don't have a mortgage? Won't you have to pay payroll taxes on any money that you are paying yourself as salary?

they can accumulate money (assets) in the business. in the long term, when they are retired they can take $$ out of the business at a rate designed to minimize taxes.

[SleeplessMommy]

Originally Posted by mamasaurus

How can we figure out what is the better long-term investment? Real estate... or cash?

I guess we have to figure out what we think our home would be worth in 15 years?

if you have a nice corner building, commercially licensed, in an upcoming "trendy" downtown location, that might be an investment. otherwise many real estate "investments" are money pits (especially new construction over 4000 square feet ... expect depreciation like you would for a new bmw.) many older people also have difficulty timing the sale of a large house. they (or the estate) ends up selling a "dated" house because they loved 80s floral wallpaper or dark paneling. i have made money in real estate, but only accidentally. i bought a very small house in 99 and sold for a move with a hot market. our current home has not increased in value with the soft real estate market.

real estate has market risk + local risk + taxes and maintenance

a 401k has market risk + asset allocation risk.

would a refi help your payment situation?

[2cutiekitties]

your plan sounds good to me. I hope it goes well with the realtor!

[VisionaryMom]

Originally Posted by SleeplessMommy

would a refi help your payment situation?

That's what I was thinking. I don't claim to be any type of expert, but if you refinanced w/o taking the equity, then you likely could reduce your payment a good bit and still get the $1600 a month rent from the business.

Our philosophy on real estate is buy, never sell. We won't sell our home when we move. We'll rent it or do something else with it. OTOH, I don't intend to use it in any way when we're retired. It's intended to provide us with a potential for income well into retirement years and eventually to leave to our children. I suppose for you, part of the "best thing" depends on what your other plans are going forward.

[TiredX2]

I think you need to talk to a tax expert.

Are there other owners of the business? BIL owned a business and took virtually nothing as salary, instead he took it all as investment/business income and didn't pay payroll taxes on it.

[yeahwhat]

Another part of the equation is what happens when you file your personal income taxes. Are you getting part of that $2000/month payroll taxes back because of mortgage interest deductions (or any other deductions?). If you are, that refund could also be thrown at retirement.

Is there a way for the business to own the house and you pay (lower) rent to the business?

The question of paying out business income vs. payroll is also something to look into with a tax specialist.

[mamasaurus]

Thank you everyone, for your replies. I so appreciate it!

Originally Posted by VisionaryMom

That's what I was thinking. I don't claim to be any type of expert, but if you refinanced w/o taking the equity, then you likely could reduce your payment a good bit and still get the $1600 a month rent from the business.

Our philosophy on real estate is buy, never sell. We won't sell our home when we move. We'll rent it or do something else with it. OTOH, I don't intend to use it in any way when we're retired. It's intended to provide us with a potential for income well into retirement years and eventually to leave to our children. I suppose for you, part of the "best thing" depends on what your other plans are going forward.

This is where we are today. We really don't want to move if we don't have to. Our house really accommodates our needs at the moment - it's a big house, but we run two businesses from it, our parents stay with us for 2 months out of every year, and it was a steal when we bought it - it is a good investment.

I like the idea of actually hanging on to it when we retire - who knows? We might consider that.

My DH has been so focused on paying off the mortgage ASAP, that is why we ended up with a 15 year fixed with payments of $4500/month. But when he really understood what we have to pay in payroll taxes in order to pay that mortgage, he relented on the idea of refinancing. (I've been wanting to refi - but I had to convince him it was the best idea financially.) We are going to refi to a new 15 year fixed at about 3.75%. Our monthly payments will be $2700. Our business can still pay $1600/month rent, and we will have to pay the other $1100. But we can easily come up with that, and the payroll taxes on that will be much less than before.

With the extra money left in the corporation from this new arrangements, we will fund our 401(K) - so that is before tax dollars going into retirement, and we are happy about that.

I'm quite relieved. This will give us a break on having to come up with a huge amount of money each month and year, but if we have a good year income-wise, we will be able to sock away a bunch for retirement through the 401(K).

[VisionaryMom]

I'm glad you decided on something. It sounds as if it will work out well for you. It's shocking to me to see how much of my pay as a self-employed person goes to taxes off the top. I researched it beforehand, but it's still...depressing.