Selling stock to buy a house can be a smart move, but it might not make sense for everyone. Before you cash in stock to buy a house, you'll want to consider things like tax implications and personal financial goals.
Here’s a list of things to think about before you sell stock to buy a house:
Selling stock to buy a house: Tax implications
If you make a profit from selling a stock, you'll have to pay capital gains tax on that profit. But you can plan ahead to reduce your taxable income from stock sales.
Capital gains tax rates are much lower than rates for ordinary income (10–37%). The IRS taxes capital gains based on three tax rates — 0%, 15%, and 20%. How much you pay will depend on how long you owned the stock, your tax status, and your taxable income.
There are two basic categories of capital gains tax: long-term and short-term.
Long-term capital gains tax
Long-term capital gains tax applies to profit from a sale of a stock you've held for over a year. Here’s what you can expect to pay for long-term capital gains tax based on your annual income.
|Tax-filing status||0% tax rate||15% tax rate||20% tax rate|
|Married, filing jointly||$0-83,350||$83,350–517,200||$517,200+|
Short-term capital gains tax
If you make a profit selling stocks you’ve held onto for less than a year, you have to pay short-term capital gains tax. The short-term tax rate is the same as your regular income tax rate — meaning it’s higher than long-term capital gains tax.
Unless you've made an absolute killing on the market, you may want to consider selling stock you’ve held for more than a year.
How much capital gains tax might I pay?
Imagine you’re a single filer earning a 70,000 salary. The long-term capital gains tax rate for your income bracket is 15%. The tax rate for short-term gains is the same as your ordinary income tax rate — 22% for a single filer in this income bracket.
|Gain||Short-term tax (22%)||Long-term tax (15%)|
Reducing capital gains tax
You can reduce your capital gains tax by selling low-performing stocks. This strategy, called tax-loss harvesting, is the process of selling investments that show a loss to reduce your taxes.
If you sell stocks at a loss, you can subtract that loss from your capital gains. If those losses are more than your gains, you can write off up to $3,000 per year to reduce your income tax. Any losses above $3,000 will carry over to next year.
Selling stock for a down payment? Don't delay
Once you’ve assessed your tax liabilities and decided which stock to sell, you should act quickly. The stock market fluctuates — sometimes in a matter of hours. If you take too long, your shares might sink before you cash out.
Act quickly but not rashly. There are still some things you need to do first.
Consult with a mortgage lender
Before you sell your stock, discuss your strategy with a mortgage. Buying a house and selling stock are big financial decisions, so ask the experts.
When you meet with your mortgage lender, discuss:
- Financing options and down payment: Check if you qualify for any special financing, like a VA or FHA loan. These loans have lower down payment requirements.
- Personalized recommendations based on your finances: Tell them about your income, savings, and debt. The mortgage lender will use this data to advise you on how to proceed.
- Pre-approval to determine your budget: A mortgage lender can tell you how much financing you are pre-approved for. That amount can help you set your budget and decide how much stock to sell.
Alternative financing options: Ask your lender about any other financing options that would make sense for you rather than selling stock.
Connect with a tax professional
If you have lingering tax questions, meet with a tax or accounting professional to help you sort through them.
Alternatives to selling stock to buy a house
Down payment assistance programs
Down payment assistance programs are government or non-profit initiatives that help homebuyers pay down payment or closing costs. Each program is slightly different. Some offer grants and others provide no-interest or forgivable loans.
You need to meet some requirements to qualify for these programs, like:
- Being a first-time homebuyer
- Having an income below a certain threshold
- Living in the home for 3-5 years
Down payment assistance programs don’t always make sense for everyone. But if you don’t have long-term stock options and meet the requirements, the programs might be a good fit.
Here are some popular programs available to homebuyers nationwide.
- American Dream Down Payment Assistance
- National Homebuyers Fund
- National Council of State Housing Agencies
Sometimes there are assistance programs specific to your area, so research your state and city to check.
Gift funds are funds a family member or close friend gives a homebuyer to help cover the down payment or closing costs. These funds are not a loan, so there's no expectation of paying them back.
Gift funds under $17,000 aren't taxed, according to the IRS. If you have someone in your life who is willing to give you the money, you might be able to avoid selling your stocks.
To receive a gift fund, you'll need a letter of explanation. The letter typically includes:
- The giver’s name, address, and phone number
- The relationship between the giver and receiver
- The gift fund amount
- A statement saying that it does not need to be repaid
Low down payment mortgages
In certain circumstances, you might be able to get a low or no down payment mortgage from a federal program. These loans typically require 0–5% down, significantly lower than the standard 10%. But you have to pay additional private mortgage insurance (PMI) until you have 80% equity in the home. So you'll probably have higher monthly mortgage payments.
Each program has eligibility requirements. For example, FHA loans are for first-time homebuyers. And conforming loans are for people with a low annual income.
We recommend that you calculate which will be higher — the capital gains tax or your PMI without selling stock. If the PMI is higher, you might want to sell your stock, pay the tax, and have more for a down payment.
Here are the most common low down payment mortgage programs and their eligibility requirements:
|Types of low down payment mortgages|
|Conforming (Fannie Mae and Freddie Mac)||FHA||USDA||VA|
|Minimum down payment||3%||3.5%||0%||0%|
|Eligibility requirements||Must meet income limits (vary by area)||580+ credit score and a first-time homebuyer||Property must be eligible, buyer must meet income requirements (vary by area)||Must be active-duty military or veteran, funding fee|
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
Is it smart to sell 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.
Do you pay capital gains if you sell stock to buy a house?
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.
Can you take money out of a mutual fund to buy a house?
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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