Assumptions & Factors:
1. Realistic Selling Price for Mill Stream Property: $700,000
2. Estimated Purchase Price of Next Home: $900,000
3. Current conventional loan limits for BEST rates maximum is $484,350
4. On the purchase of the $900K home, assume a loan of $430K to include closing costs etc.
4. Best case scenario Owner-Occupied interest rate, 30-year fixed is 4.5%
5. Best case scenario for Investment/Rental property, 30-year fixed is 5.0%
6. Property taxes & insurance NOT included in calculations since you’ll have them both.

I’ve contacted our loan specialist for some good estimates as far as payments are concerned. We have multiple scenarios to consider. There are a lot of details, but don’t worry, I will summarize them for you.


Scenario A: Maximum cash out from Mill Stream as owner-occupied = $484K to stay with best rates, payment is $2,600/month. On the $900K purchase, loan is $430K and payment is $2,180/month, total of $4,780.

Scenario B: Reverse of A, where Mill Stream becomes the investor home, and your new home is the principal residence. Mill Stream payment becomes $2,450 at 5%, new home is $2,310 at 4.5%, total = $4,760.

In short, the difference is a savings of $20/month in favor of Scenario B.

HOWEVER, that’s really the only advantage of Scenario B, and a very small one. Why? THREE important reasons:
1. Scenario B is much more complicated & difficult to qualify for, according to our loan specialist in terms of factoring in rental income. We will make sure when we find that home you both like we will package the loan as strongly as possible to make sure it goes as smoothly as it can.
2. Mill Stream is your primary residence where you have accrued residency requirements of 24 months out of the last 5 years towards $500,000 of capital gains that are EXEMPT from taxes. With your original purchase price of $245,000, and a sales price of $700,000, and assuming a rough estimate of proceeds after all fees & expenses of $655,000, that’s $410,000 that’s capital gains tax FREE. This is NOT available with Scenario B.
3. Mill Stream is your primary residence, giving you ANOTHER benefit under Proposition 60 or 90. Even though you’re NOT age 55 yet, by keeping it as your principal residence, in 2 or 3 years when you’re 55 you can then sell it and purchase another home of equal or lesser value AND bring over your lower tax assessment value to pay lower property taxes.

Scenario C: Selling Mill Stream NOW to purchase the next home. The net proceeds on a sale price of $700K would be around $655,000. On a purchase of $900K, the loan would be $255K, payments about $1,300/monthly.

To make the comparison more apples-to-apples in terms of monthly payments, if you’re willing to carry a slightly bigger loan as in Scenario A, your payment is $2,180, BUT THAT MEANS YOU HAVE AN EXTRA $900K – $484K down payment = $229,000 CASH LEFT OVER. You can then use that as down payment to help your children purchase another home.

Scenario D: Selling Mill Stream in the future after THREE years or more. In the last decline from 2007 to 2012, prices of single family homes in Chino Hills went down by 35%. For our example, let’s hope it doesn’t do that badly, but only 15% in 3 years. That means Mill Stream is now worth $600,000, down by $100,000. The second hit is losing the primary residence capital gains tax exemption because of the rental. The tricky part is since you are actually living in the new home, the IRS could potentially & easily determine that even though you named Mill Stream as your primary, they could see taxes, utilities, write-offs etc pointing to the new home as your principal residence. Using the original purchase price of $245K, and a selling price of $600K, with a net of about $565,000, you have capital gains of about $320,000, and at a rough estimated combined federal & state tax at 35%, you have to pay about $112,000 in taxes. Now the final net proceeds of selling 3 years later is $600K – fees & capital gains taxes = $453,000. And then there’s the loan of $484K, which in 3 years will have the loan amount reduced to about $459,000. Let’s just call it break even, so you have practically ZERO left.

Scenario A (Mill Stream as primary, new home as rental) has more advantages than Scenario B.

Scenario C (Sell now) vs Scenario D (Sell later): The extra $229,000 from selling now is entirely eliminated in Scenario D by just a modest market decline of just 15%, AND the paying of capital gains taxes.

Every family we have run this analysis is different. There are financial reasons, there are emotional reasons. If your goal is to help the kids long term, WITH the least amount of financial loss on yourselves, the numbers point to selling now, Scenario D.

Feel free to call anytime if we can help clarify any questions or address any points we have missed.

Thank You!

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