Can you be a millionaire, yet so far from it?
December 19th, 2006 by KenricIf I had $1,000,000 in equity in my real estate holdings I guess I could consider myself a millionaire. But what is the definition of a millionaire? To me in order to be a millionaire, one must have $1,000,000 that is all his. If I have $1,000,000 in my stock account but $500,000 is profit when I sell, then I don’t really have $1,000,000 because I’ll have to pay capital gains tax on my profit.
Assume an average investor who is fairly leveraged has $1,000,000 in equity in a real estate portfolio with a market value of $3,000,000. In order for him to liquidate his properties, he will pay 6% commission on the sale. 6% of $3,000,000 is $180,000!
It will cost him 18% of his equity to sell!
In addition, if this investor profitted $500,000 from the sale, he would pay a 15% capital gains tax and about 5% state tax (assuming AZ properties), totalling 20%. There goes another $100,000 to Uncle Sam.
When all is said and done, his $1,000,000 equity would have been shaved down to $720,000. A full 28% of it is gone before he can spend his cold hard cash on doodads.
So you can be a millionaire on paper, but not have anywhere close to $1,000,000 in real spendable cash.
Posted in Finances | 
Stumble it!
It just goes to show that you should really include “unrealised tax liability” as a debit item in your calculation of “net worth”. I must admit that I don’t bother doing this, as the amount of tax due can change depending on how you time and structure your disposal of assets, making it hard to get an exact figure. I compensate for not making any allowance for unrealised tax liability by also not including cars, household items, and other miscellany in “asset” side of my “net worth” estimate.
By Enough Wealth on Dec 19, 2006
I just came across this iste today and I’m thankful I found it. I’ve spent the first hour reading the articles here and now I realised one of my best opportunities: time. Since my eyes is opened at this age and I’m not getting any younger, I might as well plan my financial life ahead! Keep those eye opening articles coming in!
By Gloria on Dec 19, 2006
It’s funny, but even the term “millionaire” is loosely based. If I had $1,000,000 in cold cash 20 years ago, I would be considered a millionaire. Today, if I had $1,000,000, I would be considered a millioaire. However, being a millionaire today is not equivalent to being a millionaire 20 years ago, so the true meaning is fuzzy. Adjusted for 3% inflation per year, one would need to have about $1,800,000 in today’s dollars to be an equivalent millionaire 20 years ago. Of course, if the millionaire 20 years ago invested wisely in RE 20 years ago, they’d probably be a billionaire today. ;-P
By Steve on Dec 20, 2006
That’s why you don’t sell. Do a cash-out refi or HELOCs on those properties and borrow the money tax-free!
By Shaun on Dec 20, 2006