This year marks 10 years since the near-collapse of the American economy at the start of the Great Recession. Between late 2007 and 2009, stocks lost nearly half their value, or about $8 trillion. Investment bank Lehman Brothers filed for bankruptcy, and other big banks received a government bailout to avoid similar fates in 2008. Homes, considered by many to be a milestone investment and cornerstone of the American dream, had lost value in just about every real estate market in the country.
It’s a different world now that the U.S. economy has largely recovered. The big banks have rebounded and are bigger than they were before the crisis, and stocks have long since recovered. In August 2018, Wall Street set a record for the second-longest bull run since the 1929 stock market crash (that’s almost nine-and-a-half years without a fall of 20% or greater), and new home sale prices in late 2017 hit $343,400, their highest since a pre-recession peak. Even with recent increases of the federal benchmark interest rate, new home prices are still holding above $328,000.
Where people are cashing in
So who is benefiting from today’s rosy economy? MagnifyMoney analyzed IRS data going back five years — from 2013 to 2017 — to see where American taxpayers are currently reaping the most return on their investments. To determine our ranking of the 100 largest American metros, we looked not only at the capital gains per resident, but also at the percentage of residents citing capital gains on their tax returns. Capital gains include things such as the sale of stock or a home, but don’t include income from assets such as savings accounts or bonds.
The metrics were weighted evenly to create a “cashing in” score from 0 to 100 (with 100 representing a metro that would rank first in both capital gains per resident and the percentage of returns with capital gains).
- For the second consecutive year, Fort Myers, Fla., was the metro that had the largest cashing in score among the 100 largest metros in the U.S. The city had the greatest capital gains per person over the past five years, and ranked second only to nearby Sarasota in the percentage of tax returns that indicated they had a capital gain.
- We looked at tax returns filed from 2013 to 2017 — 2013 was the first year some capital gains were subject to an additional 3.8% Medicare tax on top of the regular long-term capital gain rate of 15%. But the data clearly show that capital gains fell after 2012, since many filers with capital gains preferred to claim them at a lower pre-2012 15% maximum rate, thus avoiding the additional 3.8% tax.
- Among the 100 largest metros, between 4% (in McAllen, Texas, not shown in the top-50 table) and 25% (Sarasota) of filers claimed capital gains, and average capital gains among cities ranged from $2,500 (in Fayetteville, N.C., not shown in table) to $61,348 (in Fort Myers).
In our second annual ranking of the 100 largest metro areas where residents cashed in (and paid taxes) on their investments, our analysis finds Fort Myers (with a score of 98) still topping the list, followed by San Francisco (94) and Sarasota (75).
Next up in the rankings are New York, Seattle, Boston and Reno, Nev. And, finally, Denver, Miami and Austin, Texas, round out the top 10. If you’re feeling deja vu, that may be because this year’s top 10 mirrors last year’s results (Seattle trades places with Boston for fifth place).
Though the top 10 cities remained the same, the capital gains numbers are lower. In this year’s five-year window, we observed capital gains claims across the 100 largest metros were smaller by about 20% to 30%, compared with last year’s analysis of gains from 2012 to 2016.
The likely cause? The 3.8% Medicare tax on capital gains beginning in 2013 may have led the wealthy to cash in early on investments to avoid the tax.
Top 5 cities that have realized the greatest capital gains
1. Fort Myers
Cashing in score: 98
On Florida’s west coast, Fort Myers is home to a small population of well-off retirees, helping the metro area lead the nation with more than $61,000 in capital gains per resident over the past five years, and 24% of residents claiming capital gains. In our 2017 ranking, city residents averaged nearly $103,000 in capital gains per resident.
2. San Francisco
Cashing in score: 94
Home to Silicon Valley and a competitive real estate market, San Francisco follows with nearly $57,000 realized per resident and 24% of residents cashing in. In last year’s analysis, the City by the Bay saw just over $76,000 in capital gains per resident, with the same percentage of residents claiming capital gains.
Cashing in score: 75
Back in the Sunshine State, Sarasota takes third place. It’s not because it had a higher per-resident capital gains amount than fourth-ranked New York, but because at 25% of filers, it had the highest percentage of residents citing capital gains.
Sarasota realized more than $32,000 in capital gains per resident, compared with more than $56,000 in last year’s ranking. In this year’s ranking, 1 in 4 federal filings for Sarasota residents included some sort of capital gain.
4. New York
Cashing in score: 69
With more than 8.6 million residents, the nation’s largest metro area saw nearly $40,000 in capital gains realized per resident. Last year’s figure was more than $60,000. Almost identical to our 2017 findings, just shy of 1 in 5 New York area residents included some sort of capital gain in their federal filings.
Cashing in score: 62
The Emerald City’s real estate boom may have helped it claim fifth place in our rankings, knocking down Boston to sixth. Seattle residents claimed more than $29,000 in capital gains per resident from 2013 to 2017, with 21% of residents claiming capital gains on their returns. In our 2017 rankings, the city boasted more than $47,000 in capital gains per resident, with the same portion of filers claiming some sort of capital gains.
What is a capital gain?
A capital gain is the money you make on an investment after you sell it, minus its original cost to you. According to the IRS, “almost everything you own and use for personal or investment purposes is a capital asset.” Capital gains can be realized when you sell a capital asset, such as a stock, private business, real estate or art.
Capital gains result from net-positive investments. If the price you sell for is lower than the asset’s adjusted basis (the cost to you, the owner), you realize a capital loss, which is also reported on your tax return.
Homeownership still pays
Most Americans typically accumulate wealth by purchasing a home. As of the second quarter of 2018, the Census Bureau reports 64.3% of American households are owner-occupied.
According to the Federal Reserve’s most recent Survey of Consumer Finances, homeowners have an average net worth of $231,400, versus a renter’s average net worth of $5,200. Compared to Wall Street investments such as stocks ($25,000), bonds ($100,000) and pooled investment funds ($114,000), the median value of a primary residence is significantly higher at $185,000.
Homeowners selling from 2013 to 2017 had an easier time avoiding the capital gains tax
If you sell a primary residence, you only have to pay a capital gains tax on gains that exceed $250,000 (or $500,000 for couples filing jointly).
Currently, those who sell a home they have used as a primary residence for five of the past eight years are eligible to claim the exclusion. The requirements changed because of the Trump administration’s tax reform law that went into effect in January 2018. Previously, and of note for the 2013 to 2017 returns analyzed in this report, homeowners only had to use the property as a primary residence for two of the five years before the sale.
Second homes don’t get a tax break
A second home, such as a vacation home or rental property, isn’t eligible for capital gains tax protection. That may explain why many of the metros that top the list are vacation areas such as Florida and Reno, which includes Lake Tahoe vacation homes.
Stocks help capital gains
The real estate and business climates in New York, San Francisco and Seattle likely helped them earn spots near the top of the list. All three metros have infamously tight real estate markets.
Wall Street in New York and tech companies in San Francisco’s Silicon Valley and Seattle — ranked the No. 1 and No. 2 cities for tech talent, respectively (according to research firm CBRE) — may have contributed to capital gains filings in those cities. Stocks, whether exchanged on the open market or given as equity in an employee’s compensation package as tech companies are known to do, may result in significant capital gains.
Local economies are a major factor
Local economic factors such as the community’s real estate market and regional industries play a large part in the rankings and may explain much of the variance observed in the findings.
For example, the tourism and real estate-driven economy in Myrtle Beach, S.C., averaged more than $8,200 in capital gains per resident, with 17% of residents claiming capital gains on their returns.
Meanwhile, only about 100 miles away, residents in the growing STEM (science, technology, engineering and math) economy in Charleston, S.C., averaged nearly double the gains at just over $16,000 in capital gains per resident, with a lower proportion of residents, 15%, claiming capital gains on their returns.
Where to put your money
If you’re taking money out of an asset such as a home, stocks or bonds, you may want to place it into a less-risky savings vehicle that will still earn you interest on the funds while you decide how to spend down the balance. You may place money you won’t need for a while into a high-yield certificate of deposit (CD) account, while you may put funds you intend to use soon into a more liquid high-yield savings account.
MagnifyMoney analyzed IRS Statistics of Income data for tax returns filed from Jan. 1, 2013, to Dec. 31, 2017, covering five years of tax filings, along with U.S. Census Bureau 2016 population data to create a “cashing in” score.
The 100 largest metros in the U.S. were ranked by the percentage of returns that declared capital gains, as well as the total capital gains reported per resident over the five-year period. These rankings were weighted equally to create the score for each metro. One hundred would be the highest possible score for a metro that ranks No. 1 for both metrics.
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