Selling Stock to Buy a House? Read This First

Thomas O'Shaughnessy


Thomas O'Shaughnessy

November 23rd, 2022
Updated November 23rd, 2022


sell stocks to buy a house

Liquidating some of your stock portfolio to fund a down payment on a house can seem like a safe move, and it often is. But there are tax consequences and quirks of timing that you should familiarize yourself with before you call your broker.

The only investment better than stocks is real estate, which is why many people who own stock end up selling it off to finance a real estate purchase. It can be scary to sell part of your stock portfolio for a home purchase, but unless you're selling Apple stock in the mid-80s or Google stock in the mid-00s, it's overwhelmingly likely that you're going to come out way ahead.

Of course, you still have to be careful about how and when you liquidate your holdings. Here are some things to keep in mind when converting that paper wealth to good, solid brick-and-mortar wealth.

Understand capital gains tax ramifications

Stock sales are considered taxable capital gains, but you can finesse the situation. Basically, there are two categories of capital gains: long term and short term.

If you sell stocks you've held for over a year, they'll be taxed as long-term capital gains. Long-term capital gains are taxed at a much lower tax rate than the rest of your income; in fact, if your marginal tax rate is 15% or lower, they won't be taxed at all.

On the other hand, if you've held those stocks for less than a year, that money will be classified as short-term capital gains, and they'll be taxed at the same rate as the rest of your income. Unless you've made an absolute killing on the market over the past year, you'll want to consider selling some of your older holdings.

But wait! If you haven't made a killing over the past year, if you've, ahem, taken a bit of a bath (don't be embarrassed, it happens to the best of us), there's still a way to use this opportunity to your advantage. That's because the IRS allows you to use investment losses to reduce your tax exposure.

Selling off those disappointing investments now can actually lower your tax bill. Your write-off is capped at $3,000 for the year, but anything above that will carry over to next year. So liquidating now can not only help put together that down payment but also supercharge next year's tax refund. Win-win!

Sell wisely

Most stock portfolios are split between long-term safe stocks and short-term potential high-rises. You know your investments better than anyone else, but if you're selling stock to put together a down payment, consider selling off “safe” stocks first.

If you were to sell shares of IBM, for example, it's safe to say that you could buy those shares back down the line at only a modest cost. But let's say you hold more volatile stock in a company developing self-driving cars or a hybrid reality technology outfit. Selling those stocks would get you your home, but they could also increase in value exponentially down the line.

Converting stocks to real estate is a safe bet, but make sure you don't miss out on a once-in-a-lifetime payoff in the process.

Don't delay

Say you've signed a contract and your financing is approved. You've decided to sell stock to buy a house, you've assessed your tax liabilities, and you've looked your portfolio over and selected which stocks to sell off to cover that down payment.

Now sell off, and quickly. If you're already invested in the stock market, you know how things can fluctuate in a matter of days or even hours. There's nothing more disheartening than setting aside a few thousand shares to take care of your down payment, only for a ripple in the market to send the share prices sinking before you actually cash out.

Consider alternatives to selling stock to buy a house

Savvy investor that you are, we're sure you looked into all potential options, but we'd be remiss if we didn't cover all the bases.

Down payment assistance programs

If you're selling stock to come up with a down payment, you should also consider first-time home buyer programs that could help you with your down payment, or financing that only requires as little as 3% down.

Federal Housing Administration (FHA) programs, administered through Fannie Mae and Freddie Mac, offer conventional loans with only 3% down if you're a first-time home buyer. If you qualify for these loans, you may be able to close on a home without dipping into your investment portfolio.

Keep in mind, however, that when you break down the numbers on a low down payment mortgage, the long-term math may not be as advantageous as it seems. If you purchase a $500,000 house at 4% interest with an FHA loan at 3.5% down, your monthly mortgage payments are going to be about $2,670. That same house, with 20% down on a conventional loan, would come to only a $1,672 monthly payment.

Conventional loans

Conventional loans are loans offered by private financial institutions — such as your local bank or credit union — that, unlike FHA loans, are not offered or secured by a government entity.

Let's look at some other ways conventional loans differ from FHA loans:

  • Conventional loans are generally more flexible than FHA loans. You can sometimes obtain a conventional loan with a slightly smaller down payment than an FHA loan — although your eligibility for a smaller down payment depends on your savings and credit score.

  • Conventional loans can be used for a wider variety of property types, such as investment properties and vacation homes. FHA loans, in contrast, can be used only to buy a primary residence.

  • Conventional loans don’t always require mortgage insurance. With these types of loans, you’ll need to pay mortgage insurance only if your down payment is less than 20%. FHA loans always require mortgage insurance, regardless of the down payment amount, which can result in a higher monthly mortgage payment.

  • Conventional loans are typically harder to qualify for than FHA loans. You’ll usually need a credit score of at least 620, whereas FHA loans are sometimes available to borrowers with credit scores in the low 500s.

Of course, the best person to answer any questions you might have about home buying is an experienced local real estate agent.

Clever Partner Agents are top performers in their markets and come from top brands and brokerages. They’re familiar with every aspect of the home buying process and can advise you on all your options, every step of the way. If you have any questions at all, contact us today for a no-obligation consultation!

Frequently asked questions about selling stock to buy a house

Yes, in many cases selling stock for a down payment on a house is a smart move. Generally speaking, the only investment that performs better than the stock market is real estate. But remember that the IRS taxes capital gains, including stock sales. Determining whether selling stocks to buy a house makes sense for you will depend on how big your tax bill is.

Typically, you'll have to pay tax on capital gains if you sell stock to buy a house. The amount you pay (if any) depends on a number of factors. For example, holding stocks for more than a year will lower your tax bill. On the other hand, if you’ve held the stocks for under a year, you’ll most likely have to pay short-term capital gains, which are higher. But if you’ve lost money on your stocks, you can write off the investment losses, which will lower your tax bill. Another factor is your marginal tax bracket. If it's less than 15%, you may not have to pay tax on your stock sales.

Yes, you can take money out of your mutual fund to buy a house. But just like with the sale of other stocks, you’ll likely have to pay tax on the withdrawal. Also, check with your financial institution first about any fees you’ll face for withdrawing. Some institutions, for example, charge fees if you withdraw from your fund less than a year after purchase, while others charge a maintenance fee if your funds fall below a certain threshold.

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