In 1971, Warren Buffett Paid $150,000 For A Beach House In California. When It Came Time To Sell, He May Have Owed The Government As Much As $2.7 Million. Here’s What You …
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Warren Buffett bought a Laguna Beach vacation home for $150,000 in 1971 and sold it for $7.47 million in 2018, earning a 9% compounded annual return.
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Combined federal and California taxes on the $7.32 million gain could total roughly $2.7 million, which works out to about 37% of the profit and 18 times the purchase price.
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Vacation home sellers can’t use the primary-residence exclusion, but strategies like installment sales, 1031 exchanges, or tracking improvement receipts can reduce the tax hit.
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In 1971, Warren Buffett paid $150,000 for a 3,588-square-foot oceanfront home in Emerald Bay, Laguna Beach, according to GOBankingRates. Buffett lives in Nebraska, so this was a classic second home. That status determined how much tax its sale could trigger.
Selling the house took a while. MPA reported it was listed at $11 million in early 2017 and cut to $7.9 million by September 2018.
The Orange County Register reported in October 2018 that it sold for $7.47 million. The Real Deal reported that price was 32% below the asking price.
Even with the discount, a University of Maryland professor calculated a 9% compounded annual return on the house. Decades of growth like that are exactly what make a second-home sale expensive at tax time.
How a $150,000 House Turns Into a Seven-Figure Tax Estimate
Buffett’s actual tax bill is not public. 24/7 Wall St. built an illustrative estimate from the public purchase and sale prices. It assumes no improvements and no selling costs. It also uses today’s top rates, which may not match what applied to Buffett in 2018.
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By this estimate, Buffett may have owed about $2.7 million, or 37% of the gain. That’s roughly 18 times what he paid for the house. The federal tax alone comes to about 11 times the purchase price.
Selling costs would lower the figure. If these costs ran 5% of the sale price the combined estimate falls to about $2.6 million.
Why Vacation Home Gains Get Taxed in Full
Federal long-term gains are taxed at 0%, 15% or 20%, depending on income. All the gain lands in one tax year, so a single sale can push a modest earner into a higher rate.
The 3.8% net investment income tax adds another layer. It applies to whichever is smaller: your net investment income, or your income above $200,000 for most single filers ($250,000 for joint filers). Gain on property you don’t use in a business counts as investment income, so a vacation home sale is covered.
The main-home exclusion shields up to $250,000 of gain, or $500,000 on most joint returns. To qualify, you must own the home and live in it as your principal residence for two of the five years before the sale. A vacation home that isn’t your main home doesn’t qualify.
California taxes gain on California real estate even when the seller lives elsewhere. A nonresident figures tax as if they lived in California, then applies that effective rate to the California portion of their income (FTB Publication 1100). According to HCO, the top rate is 13.3%. That’s a 12.3% bracket plus a 1% mental health services tax on income over $1 million.
Per FTB Form 593, the buyer or escrow company generally must withhold 3 1/3% of the sale price at closing for individual sellers. The seller can choose 12.3% of the gain instead. A principal-residence sale is exempt, but a second home is not.
Your home state may give some of that back. OnNebraska Form 1040N Schedule II, the credit for tax paid to another state is capped at the smallest of three amounts: Nebraska’s own tax, a proportional calculation, or the tax actually paid to the other state (Nebraska Form 1040N Schedule II).
Six Questions to Ask a Tax Professional Before You Sell
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Basis records: Improvements can raise your cost basis and reduce the gain. You need receipts to back them up, and regular fixes generally don’t count.
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Holding until death: Heirs generally get a basis equal to the home’s fair market value at death, so a life of appreciation escapes income tax (26 U.S.C. § 1014(a)(1)). Estate tax is a separate issue, and if you give the home away while alive, your original basis carries over (26 U.S.C. § 1015(a)).
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Donating it: Giving appreciated property to charity can avoid tax on the appreciation and allow a deduction at fair market value, subject to IRS limits. Donations worth more than $5,000 generally need a qualified appraisal and Form 8283, Section B.
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Installment sale: You report the gain as payments come in, which spreads the tax over several years (IRS Publication 537). Interest the buyer pays you is taxed as ordinary income (IRS Publication 523).
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Rental use and a 1031 exchange (a tax-deferred trade into similar investment property): According to IPX, the Rev. Proc. 2008-16 safe harbor generally requires owning the property two years and renting it at fair market value at least 14 days in each of those years. Personal use is capped at 14 days or 10% of rental days, whichever is greater, and the conditions are strict.
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Changing to a main home: Since 2009, years when the home wasn’t your principal residence reduce the exclusion proportionally (26 U.S.C. § 121(b)(5)). Per the Journal of Accountancy, moving in soon before you sell won’t wipe out the gain built up earlier.
Run Your Numbers Before You List
Start with your purchase records and improvement receipts, and estimate your gain. Then check which federal and state brackets it lands in, including the surtax and any Medicare effect. A vacation home sale is one of several quiet tax traps that can drain six figures from a retirement plan, and we mapped the rest in a free guide here. This is general information, not tax advice, and rules and thresholds change. Bring your numbers to a tax professional before you sell, because most of the options above work only if you set them up before the sale.
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