Liquidating some of your stock portfolio to purchase real estate 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 to buy a home, 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 the Tax Ramifications
Selling stocks could expose you to capital gains tax liability, but there are ways to 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 in the past year (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 capital gains exposure.
So 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, it can supercharge next year's tax refund. Win-win!
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, for example, IBM, 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, say, a company developing self-driving cars or a mixed/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.
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, 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.
Look Into Down Payment Assistance Programs
Savvy investor that you are, we're sure that you looked into all potential options, but we'd be remiss if we didn't cover all the bases.
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 that home without even 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 payment is 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.
Of course, the best person to answer any questions you might have about home buying is a great 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!