You may not have to pay tax on all or part of the gain from the sale of your main home. This is where you live most of the time. A main home can be a:
- Houseboat (cool!)
- Mobile home
- Cooperative apartment
Actually, everybody can get this break on capital gains on the sale of a home under certain circumstances, but military members get an additional benefit that makes it much easier to meet the requirements.
WHAT IS THE CAPITAL GAINS TAX?
Cars, stocks, and bonds are capital assets. A home is also considered a capital asset because it is a significant piece of property. When you sell it for more than you paid, it’s called a capital gain.
When you sell a stock for more than you paid, you’ll need to report that to the IRS and pay taxes on the capital gain. Primary homes get excluded from this as long as it fits certain criteria called the ownership and use test.
OWNERSHIP AND USE TEST
To be eligible for excluding capital gains on your primary residence, you must be the ownership and use test, as outlined in Publication 3 – Armed Forces Tax Guide. You will be eligible for the exclusion if, during the 5-year period ending on the date of sale, you:
- Owned the home for at least 2 years (the ownership test)
- Lived in the home as your main home for at least 2 years (the use test)
If you don’t fully meet these two tests, you still may be eligible for a partial exclusion. See IRS Pub. 523 for more details, and consult a smart tax advisor.
This is commonly explained as you have lived in your primary residence 2 of the last 5 years.
HOW MUCH CAN YOU EXCLUDE?
It seems like it should be unlimited, right?
Dream on. The USGOV would never allow that!
You can exclude up to $250,000 of capital gains if filing single / $500,000 if filing jointly.
This exclusion is allowed each time you sell your main home, but generally not more than once every two years.
WHERE MEMBERS OF ARMED FORCES GET AN ADDITIONAL BENEFIT
Here’s the good part!
Charles Schwab index funds fees are certainly among the lowest.
There is a fierce battle waging between the big firms for the lowest index fund management fees.
We can thank Vanguard for low fees overall. I think they started kicking too much ass and taking too much market share, so Fidelity and Charles Schwab index funds took notice and started slashing their fees.
This has been nothing but good for investors. I’ll have to keep this and other similar posts constantly updated, as prices are slashed among the big three often. I’ll summarize the recent changes later.
INTRODUCTION OF INVESTING AT SCHWAB
When you buy Charles Schwab index funds, here’s some of what you get:
- Mutual Fund OneSource service funds and other No Transaction Fee funds are $0 for online trades
- All other mutual funds cost up to $76 to buy and $0 to sell
- Online stock trades are $4.95 per trade
- Online Schwab ETF OneSource trade are free
- Other ETFs can be purchased for $4.95 per trade
If you are going to buy Schwab index funds outside of the Schwab mutual fund family, definitely invest somewhere else. Their fee for other mutual funds really makes it cost prohibitive (that means way too damn expensive!)
WHAT’S AWESOME ABOUT CHARLES SCHWAB INDEX FUNDS?
- $167 billion under management in mutual funds and ETFs
- 3rd largest provider of index funds (behind Vanguard and Fidelity)
- No minimums to invest (This is an issue at Vanguard)
CHARLES SCHWAB INDEX FUNDS
I’m going to talk about the features and fees of the three most popular and competitive mutual fund categories. Here we go!
S&P 500 INDEX FUND
Aaa yes, the benchmark of all index funds in my opinion. It has a dear place in my heart as my main investment during most of my military career.
It is Warren Buffett index fund recommendation of choice.
EXPENSE FEE: .02%
MINIMUM INVESTMENT: NONE
Maybe you’ve made some of these mistakes military members make.
I made a few of these mistakes myself, but I’m still here today doing relatively well.
Let’s see how you measure up.
1. GOING INTO DEBT
I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.
It’s living large when you haven’t made that money yet.
Spending money you haven’t earned. Otherwise known as… Keeping up with the Jones’s.
The funny thing is, the Jones’s are going into debt to keep up with you too!
Here are some things that will really put you into debt:
Buying or renting much more house than you need…
I see it time and time again in the military. A married couple with one newborn buying a 4000 sq ft property. Not sure what they will do with 6 bedrooms and 4 baths!
You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)
Having a new house custom built…
But it’s so nice to have a big house built to your specifications. You deserve it!
Big houses need lots of things to fill them up. They just don’t look right without expensive furniture and nice cars. They are also expensive to heat and cool. Good luck!
New or expensive cars…
Whatever you do, don’t buy a new car. On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales. You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.
I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.
Vacationing while overseas…
You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one. You are in Japan, and it’s the perfect gateway to Southeast Asia. Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas.
Don’t overdo it. Take advantage of existing geography and vacation in areas around you that you. Try to drive there instead of flying, and try to Airbnb instead of hotels.
The cardinal sins of debt…
What Exactly is the VA Loan?
The VA Loan is a mortgage that helps veterans finance the purchase of homes with good loan terms and interest rates that are typically better than what you would see on other types of mortgages.
VA home loans aren’t made by the VA itself, but by private lenders such as banks, savings and loans associations, and mortgage companies. VA guarantees the loan if and when the applicant is approved.
People often say the VA guarantees loans, but that’s not accurate. Actually, the VA guarantees a portion of the loan. This still gives lenders a lot more comfort in lending, because if you stop paying, there is a higher chance they won’t lose any money on the deal.
For loans over $144,000, the maximum guarantee amount is 25% of the 2019 VA county loan limit. For most counties in the U.S., this amount is $484,350. For high cost of living areas such as Honolulu or even certain parts of Denver, the amount is $726,525.
What’s the Most I Can Borrow?
There actually is no limit. The issue is, are you trying to avoid a down payment?
In most cases, if you don’t exceed the county loan limit, then you can get that loan with no money down (Yay!).
Once you surpass the county loan limit, the lender will want a down payment from you because the VA will not provide a guarantee for that portion of the money.
Click here for a PDF linking to all the 2019 county loan limits
I want to be clear about this, because it’s confusing.
If you wanted to borrow $800,000 for a house in Honolulu, you might be required to put up a down payment on a VA loan, but it won’t be as big as you think.
You wouldn’t be responsible for the down payment on the entire amount, just for a down payment on the amount exceeding the county loan limit.
$800,000 want to borrow
$726,525 county loan limit
$73,475 amount exceeded county loan limit
The lender may ask you to make a 20% down payment on $73,475, which works out to be about to be $14,695.
That’s way cheaper than paying 20% on $800,000 which is $160,000. Ouch!
So buying a really expensive house (even a 4-plex) in Honolulu or a similar HCOL area with a VA loan may not be possible with no money down, but you might be able to do it with a small down payment.
You CAN, but that doesn’t necessarily mean you SHOULD. There are many factors to consider. Often, expensive rental properties in HCOL areas do not make great rentals, and I recommend against them for military members.
Read my article Real Estate Mistakes Military Members Should Avoid
So bottom line, there is no VA limit to how much you can borrow.
You have to put a down payment on the amount over the county loan limit you want to borrow.
I have a deep love for real estate that I can’t fully put into words.
I’ve done several podcasts and interviews and been asked on many occasions why I got into real estate.
It took me a while to figure out the real answer.
It’s a deep respect for what real estate meant in my Grandmother’s life.
She’s the first househacker I ever met, although when I heard about her real estate story as a child, I didn’t know that was called househacking.
I just knew it was smart.
As you’ll see, however, her story is so much more than just househacking.
My Grandma grew up poor. Really poor.
She was raised in Los Angeles in a neighborhood known as Watts.
In case you haven’t heard of Watts, it has a reputation for being a low-income, high crime area.
It’s well-known for gang problems and the Watts riots of 1965. Since the 50’s, it’s been a rough neighborhood. It’s still rough today, although improving.
My grandma eventually moved to Glendale, California and married when she was very young.
She had three children with my blood grandfather and adopted a child as well. I’ve never met my Grandfather. Apparently, he wasn’t much of a family man. He wasn’t cut out for family life, and left when my mother was about 8.
So my Grandma was left to raise four children on her own without any help from the father.
Grandma was frugal. She had to be.
She worked at an insurance company in L.A. making about $500 a month. She owned a house that was worth $36,000 and eventually paid it off. (Smart move Grandma!)
Her car was paid off as well.
She ran into a dilemma at work where they wanted to move the insurance offices from Glendale to Costa Mesa, a more expensive area near the beach. (This is all in the vicinity of L.A.)
She got some great advice from her mother-in-law, ironically enough, that she should buy a four-plex close to the new office, live in it, and rent out the other three units.
I’m sharing several TSP allocation strategies.
The Thrift Savings Plan is a defined contribution plan for United States civil service employees and retirees as well as for members of the uniformed services.
It is the rough equivalent of a 401k for military and civil service employees.
I’m not here to tell you which TSP investment strategy is best, that’s a fool’s errand. Giving this type of TSP advice is impossible.
The only way to do that is to go into the future, see how things turn out, and then tell you which TSP allocation would have been ideal.
I will, however, give you the tools to make an informed decision about the best TSP strategy for you with some good food for thought.
Several of these TSP investment strategies are recommended by well-known money gurus such as Warren Buffett and Dave Ramsey. The Dave Ramsey TSP allocation recommendation is a widely-searched google term.
I’ve added every other TSP investment option I could find that will work with the funds as well.
Most of these TSP allocation strategies should work well if you regularly contribute to your thrift savings plan, ensure you are getting matching if it’s offered, and stick with the same TSP investing strategy over the long term.
I would caution against jumping back and forth between TSP investing strategies every time you find something bright and shiny. Many people erode their long term returns by “dancing in and out of the market.” (Warren Buffett)
To understand all this TSP advice, you must first get to know the five core funds inside the TSP and what they consist of. This is important in understanding how they are used in building TSP investing portfolios.
TSP INVESTING GUIDE – THE FUNDS
The G fund contains short term U.S. Treasury securities with no exposure to the risk of the bond or stock market
The F fund is an index of world-wide government, corporate, and mortgage-backed bonds
The C fund is equivalent to the S&P 500 index.
The S fund is an index of mid and small-cap stocks not included in the S&P 500.
The I fund mimics the MSCI EAFE Index of international stocks in 21 developed markets excluding the United States and Canada.
The L funds are professionally managed investment funds tailored to a specific time horizon.
Now we dive into each one a little more in depth before going into our TSP investment strategies:
The G Fund – The Government Security Investment Fund
Pros: No volatility and backed by full faith and credit of the U.S. government
Cons: Can barely match the inflation rate; rate based on prevailing interest rate, which is currently low
This unique investment is only available for TSP investing. It’s rate is equal to 10-year treasuries, but their liquidity and protection from interest rate fluctuations is superior to 3-month T-bills.
The interest rate resets monthly and is based on the average of U.S. treasuries with a duration of 4 year or more.
I’ll tell you how I’ve invested most of my career.
S&P 500 index fund. That’s it.
But, shouldn’t I be able to do better than that?
This post will show you a data-proven way to boost your index fund returns.
Paul Merriman is a believer in index fund investing. Additionally, he is a nationally recognized authority on mutual funds, index investing, asset allocation, and ran his own investment advisory firm since 1983. Paul has been on Wall Street since the 1960’s.
He’s been preaching something called the ultimate buy-and-hold portfolio for the past 20 years. His ideas aren’t revolutionary. It’s very similar to Larry Swedroe’s research on small value stocks and their superior performance over long periods of time. Moreover, he believes in the work of Dr. Fauna and Dr. French in regards to diversification to increase returns without adding risk.
With the ultimate buy-and-hold portfolio, we are going to keep the S&P 500 index, but only 10% of the portfolio, and then give 10% each to 9 other asset classes.
Most people say nothing outperforms the S&P 500 index over the long term. Well, that’s not exactly true.
Over the long term, 8 of the 9 asset classes we’ll be diversifying with have outperformed the S&P 500. Consequently, the risk is also roughly the same.
So the main ingredient in this portfolio is still the S&P 500 index. According to Merriman’s research, it has compounded at 9.3% between the years of 1970 to 2016.
Personally, that feels a bit high, but we’ll stick with his numbers today. I’m more comfortable claiming a historic 7% rate.
THE ULTIMATE BUY-AND-HOLD PORTFOLIO
For the sake of explaining this portfolio, think of the S&P 500 index as Portfolio 1. To start, we will invest $100,000 into our portfolio today between the dates of 1970-2016 to illustrate the growth that would have occurred with each step of diversification over that period.
At 9.3%, $100,000 would have grown to $6.5 million. No way I can live off that! We’ve got to do better!!
Compound return: 9.3%
Growth: $6.5 million
It is possible to retire a military millionaire?
I did it well before retirement.
That’s with making plenty of mistakes along the way.
No trust fund, no help, wife didn’t work.
How can the average military member go from being in debt to military millionaire?
We all see websites, books, and courses from people who were deep in debt and somehow quickly made millions.
ALL THAT STUFF IS SHADY!
These gurus get rich off people looking for shortcuts. Most that try the guru route fail miserably.
It often involves going into lots of debt or paying a lot upfront for a product, course, or coaching.
These products do a good job of making money for who’s selling them.
They do a poor job of making you anything!
It also requires no common sense
Finding a mentor to further your real estate investing goals is an important step.
This advice is written in most books and blogs on the subject.
There isn’t, however, usually a very good explanation of how one should go about finding a mentor.
This would probably explain why most people screw this step up so badly.
I’ll tell you what I’ve seen since having my blog.
WHAT NOT TO DO
I’m not even a very popular blogger or real estate investor (yet), but I’ve received hundreds of unsolicited emails that roughly read the same:
Hey, I love your blog. I loved your podcast, it really spoke to me. You might be surprised to hear this, but I’ve been thinking about investing in Alabama! Isn’t that where your houses are? What are the chances?
Will you be my mentor? Can I use your management company? Who’s your realtor? Thank you so much for your time.
No, that’s not his actual name.
I will tell you that the success rate so far of this approach, and this may surprise you, is 0%.
What a greedy bastard! He doesn’t give back at all!
To be fair, a couple of my blog posts, including my Complete Guide to Real Estate Investing, talk about how important it is to find a mentor to guide you on your journey.
Also, on my blog, I tell the story of how I found my mentor and I just kind of casually asked him if he would show me how to do what he’s doing. I probably made it look pretty easy.
That is what I will illustrate in today’s post. The proper way to go about getting a mentor. I’ll also talk about the wrong way. The email above is a good example of that.
DON’T USE THE “M” WORD
There are lots of turnkey property companies out there, and some are more reputable than others. This question deserves a fair shake. I’ll try to give it one, but I have some strong opinions about this.
WHAT IS A TURNKEY PROPERTY – DEFINITION
A turnkey property is a fully renovated home that is purchased by an investor. It can either be rented out immediately by the investor, or more commonly, comes already rented out with a property management company in place.
In essence, it’s answering one of the most common real estate needs out there:
I live in an expensive area, and I can’t invest here, but I want to invest somewhere, what should I do?
Use a turnkey property company!!!
It’s a potential solution to long distance investing. Turnkey property providers usually buy distressed properties in good rental markets (not high cost of living areas). They buy at a discounted price, and then rehab the property so it’s move-in ready.
At this point, they can either sell it to an investor, or go a step further. They’ll find a local management company, get a tenant placed, and sell the property to investors with tenants and property management in place.
It’s supposed to be a win-win. The turnkey property company flips the property to the investor for a mark-up, but there is still supposed to be enough “meat on the bone” for a decent return on investment (ROI) for the investor as well.
Typically, these companies will estimate an ROI of 7-12%, although that’s if nothing ever goes wrong (stuff always goes wrong).
Let’s show the numbers on what a turnkey property might do:
TURNKEY PROPERTY NUMBERS
They buy a house for $35,000 that needs lots of work.
They fix it up for $15,000
They sell it to you for $100,000
It rents out for $1000 a month.
As you can see, they profited $50,000 on the flip to you, but you still got a house that rents for $1000 a month. Doing some very simple math, you could estimate this ROI to be about 6%.