In Defense of NIMBYs
The people, not the policies. The policies are horrifying.
Let’s say you bought an apartment in New York City in the 1970s, at the beginning of your career. It was likely expensive then — a little too much, maybe, for your starting salary in what would turn out to be a long and successful endeavor in finance. Now, at the turn of the quarter century, it’s worth a lot more, maybe 90% more, and all of that is taxable. Unfortunately, if you were to sell it, the US government would charge you about $450,000 for the privilege at a sale price of $1.5 million for the average Manhattan apartment (feel free to test your own assumptions on the linked calculator). Sounds pretty steep right?
The good news is that there are a few ways to avoid this tax burden1.
The first is just…don’t sell the house. Not only won’t you have to pay taxes if you don’t sell, your kids won’t ever have to pay the taxes you would have owed due to the step up basis adjustment. That’s right! No matter how many bright eyed, young couples come to you asking to buy your house so that they can start a new life in their dream city, simply clutch it to your chest until you r children literally pry it from your cold dead hands and sell it tax free.
This article may not sound like it’s heading toward a defense of the NIMBY elderly, but I assure you, none of the ire here is directed at the people who the policy affects on either side2. In no uncertain terms, your grandpa, would have to be completely out of his mind (or hate you) to give half-a-million dollars of your inheritance away to the US government so that a random couple, lacking such robust family connections, could live in your childhood home. People, and the world, simply do not work that way and the people that think it does work that way….well…actually they’re about to be in charge of New York.
Ok, back to tax evasion3, the other major way you can avoid taxes is by doing what’s called a 1031 Exchange. This basically says that if you sell a property, you have a set time period to acquire a similar property or set of properties, in order to pay no capital gains tax on what you spent for the new properties4. Hooray!
What’s even better is that this exchange doesn’t work for stocks, bonds, or business investments — so all those idiots out there investing in American small businesses or the broader economy still have to pay their taxes567. Suckers!
But! New York is probably not where you want to buy your exchange property. At this point our hypothetical bright eyed couple (with a baby on the way) has been priced out of New York and are probably looking for a home somewhere in New Jersey or the outer boroughs. They might even be looking somewhere trendy (in housing market terms) like Ohio, Texas, or Florida.
And they’re right to do so. There are huge taxes and fees in New York that weren’t there in the 1970s. Everything from the local taxes to closing costs to brokers fees to HOA shennaniga’s are bonkers here — and in most other major cities. Really you want to look outward and snap up houses in the affordable suburbs before those uppity young people can get them.
You’ll avoid all the New York craziness of course and, in addition, those smaller starter homes are easier to rent and much more liquid. As a retiree, you need income without too many taxes. Should you need money immediately, the tax consequences of selling a $300,000 property are much less than selling a single $2 million monstrosity and those young couples are much more likely to be able to afford the high-but-fair rent you charge8. See they’ll have their house — at your pleasure of course.
I mean, okay, the real downside here is that your children will inherit close to a million dollars of debt and a bunch of dubious, quickly constructed properties in Ohio. But we’ve structured society intelligently, and in a way where young people can afford to take on more risky debt right?
So you want 3-5 solid McMansions, nothing bigger.
Ok now you’ve got your rental properties, paid in cash to beat out the competition, BUT, there’s more you can do, courtesy of Uncle Sam’s unhinged mortgage deduction framework. See, unlike businesses and stocks, the interest paid towards mortgages on your primary and secondary residences (you’ve got at least two right? Who doesn’t?) is deductible against lots of other types of income.
See, as a retiree, you likely have a bunch of other savings in things like a 401k stock portfolio and all of that stuff doesn’t enjoy the same great tax benefits your real estate does — so you need to find a tax deduction to cover the income you’re going to be pulling out of that in retirement.
Enter your leveraged primary residence(s) tax deduction machine!
First, you need secured debt. That means debt that is booked against assets like…more houses. Unfortunately, you bought all of your current properties with cash, so it’s time to buy a couple more, but this time with irresponsible amounts of debt. In addition to the 3-5 rental properties you bought with your New York proceeds, you should use your remaining cash for a down payment to take out debt against two additional residences — a primary home and a secondary home, together totaling about $750,000 in value to secure a comparable loan with deductible interest.
This means that you can pay off your mortgages with proceeds from your tax-vulnerable stock portfolio and you’ll be able to deduct any taxes you pay on stock capital gains with the interest you are accruing by owning 7 fucking houses leveraged to the gills.
I mean, okay, the real downside here is that your children will inherit close to a million dollars of debt and a bunch of dubious, quickly constructed properties in Ohio. But we’ve structured society intelligently, and in a way where young people can afford to take on more risky debt right?
Anyway. Congrats! Welcome to your tax free, multimillionaire retirement.
If you think this article is an attack on rich boomers, then you’re probably the person I’m writing for. You’re likely a young person who believes you will be different than the boomers when you have money, that when confronted with this trillion dollar tax and subsidy system accidentally designed to artificially inflate home prices and cut young people out of the market you’ll somehow overcome it with…feelings.
The truth is, if you are ever lucky enough to be in the position of the hypothetical rich boomer above, you will do exactly what they did or you will watch your generational wealth and influence trickle away to taxes and bad business decisions.
It’s right now, not later that your interests are aligned with good housing policy. Right now you are a renter or that bright eyed pregnant couple and you should be advocating for yourself. You should be angry that people your age are skipping elections and staying quiet. If this stuff bothers you and — if you understand what I’m telling you about tax law — it probably does, then you should get interested in the step-up-basis. You should be interested in the boring stuff, not the quick fixes, not whatever people are calling Trump in the media these days.
It’s unlikely things will change. Asking large groups of young people to be interested in tax policy that isn’t an obvious tax cut hasn’t worked up to this point. “Racism” polls as a higher priority issue among Democrats than things like taxes, infrastructure, and unemployment — so I have neither contempt nor much hope for Americans on this particular issue.
But, as Abraham Lincoln once famously said, “America was founded on the principle of concentrated generational wealth, so don’t you fucking dare sell your house unless there’s a corpse.”
It will very quickly become apparent that none of this is tax advice.
My parents own property. This isn’t some revolutionary manifesto.
My popular Substacks, like my popular articles during my cybersecurity career, will be read at a table by concerned FBI agents.
Terms and conditions may apply, see a tax advisor for details.
Yes, I’m aware that there are a ton of State and Federal small business deductions but I still don’t think any of them are quite as juicy as the 1031 Exchange. It’s just full on broken.
Yes I, also, understand that the 1031 Exchange was created so that people selling their primary residence in a high demand area wouldn’t have to downgrade because of capital gains tax. Color me skeptical on that as it primarily covers investment properties in the statute.
Any other thoughts, hypothetical tax accountant who reads my Substack?
If they wait to have kids, of course.