Selling stocks and buying a home

Hi all. I didn’t know what subject to place for this topic. Some of you may remember me, I was mulling over getting a mortgage vs. getting a margin loan against stocks. I had to stop and have unexpected surgery, so I’m back at it again. We thought we found a decent mortgage broker, but the fees were insane. Now we are looking at simply selling stock to buy the house. This would involve selling about $750K of stock and I wanted to ask for advice on the tax implications. (our portfolio is a little over $3 million) Some of you may remember that we are retirees, have SS income, and basically live off of selling shares of stock each year to cover our living expenses. Of course, we usually sell about 50K of stock each year, so the taxes work out easily. So, now I am asking for tax implications with selling $750K worth of share in one month. I know we will probably have to pay capital gains, but I am looking for the rules, amounts, etc. Thanks so much. If it matters, we will sell our own house about 4 months after moving into the new house, which will gain us $400K, which we will put back into the stock market. I don’t think there is anyway to shuffle this amount back into the stocks without paying capital gains on the ones we have sold. AND!! For those of you wondering, we are still looking into a secured loan from Morgan Stanley. I think it’s 5.49% fixed for 3 years. I guess it’s just ME, but I just want to pay cash and be done with it. However, if we will owe lots in income tax, then maybe I am back to the margin loan. Sorry to be so tedius about this. Try not to bash me too much. LOL

You will get best answers on the Tax Strategy discussion board. They are the experts. If you lived in the house you are selling for two of the last five years, you qualify for the married home owners exemption. So no federal income tax on the sale of your home. But not sure about your state income tax.

There is a zero capital gains bracket, but your $50K sale of stock probably consumes that. So you expect to pay 15% on your $750K up to agi $250K. Anything above that is also subject to 3.9% Obama tax. Plus state income taxes.

Hi Footsox,

You really should seek professional advice on this. If you only sell enough stock to cover the difference in cost between the two homes and borrow the difference for a few months, that alone will save you five figures in taxes by not selling $400,000 in stock assuming 20% of the funds received are capital gains.
If you use an asset based loan for three years you can at least spread out the taxes. These are just two very simple ways to not pay taxes for no reason. I am sure there are many other strategies that are even better, but to complain about the mortgage brokers fees while willingly throwing away money to taxes is definitely penny wise and pound foolish. Please don’t.

Jk

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Hi Paul, Thanks. We are in Florida, so no State income tax. We have lived in our existing house for 25 years, so I guess we qualify for the married home owner’s exemption. Can you expand on that a little? Thx.

Hi Jim. Thanks. Yeah, it’s looking like getting an asset based loan for 3 years is our best choice. I guess I am old school and want to always pay things off. I will have to get used to the idea of a 3 year loan. Thanks for the info.

Wow!!! Unbelievable. Someone actually pays off a loan. Now that’s a new one. Good for you Footsox.

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The taxes don’t really depend on how many dollars of stock you are selling. You could sell $750k of stock and not have to pay a single dollar in taxes if you had paid $751k for the stock. What matters is how much you have in gains in the stocks that you are selling and how long you have held the stocks.

So what you need to do to help you figure out what taxes you will incur is to figure out how much gain you have in the stocks that you are planning on selling.

You can help minimize your taxes by:

  1. Selling stocks that have low capital gains, or even those with capital losses
  2. For stocks with gains, be sure you have held the stocks for at least 1 year and 1 day
  3. Selling specific lots of stocks to help you accomplish the above

Some brokers will help you identify the most tax advantaged set of stocks to sell, so you should see if yours does.

Short term capital gains are taxed at ordinary income rates.

Long term capital gains (for stocks held at least 1 year and 1 day) are taxed at capital gains rates. From Forbes Capital Gains Tax Rates For 2023 And 2024 – Forbes Advisor LTCG rates are:

Additional things to watch out for:

  • If 85% of your SS income wasn’t already being taxed, it likely will be for the year that you sell the stock
  • NIIT (Net Investment Income Tax) is a 3.8% additional tax that will be added for any investment income over $250k for MFJ

No, there’s not. Taxes are generated by selling a stock. It doesn’t matter what you invest in later - there’s no offset just because you buy more stock.

Well, by paying 5.49%, you could manage the sale of stocks in 4 calendar years (2024, 2025, 2026 and 2027) in order to minimize taxes before the fixed rate on the loan expires.

Keep in mind that the tax laws will change in 2026, since many of the TCJA provisions expire on Dec 31, 2025, so Congress may pass a new law.

AJ

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The capital gains exemption for MFJ will exempt up to $500k in capital gains from the sale of your primary home if you have owned and lived in the home for at least 2 out of the last 5 years, and have not used the exemption in the last 2 years. You still need to figure your capital gains on the house, adjusting for any depreciation from using the home for business/rental, etc. and may still owe taxes on some of the gain because of that.

AJ

I’m not sure why you’re looking at a fixed 3 year loan. You can get bridge loans or other short term vehicles anywhere from 6 months to 5 years. Since you will be selling the house you would likely need to secure the loan with a portion of your stock portfolio, but since you are not trading in and out all the time it seems that would not cause you big problems.

As for the other, selling stock means you immediately pay taxes. You do not recapture any of that money - ever - no matter what you do. (Yes, you will have to pay taxes on it someday, maybe, unless you die with that portfolio and it passes to your kids, but we’re getting a bit in the weeds here.)

Without doing the calculations myself I would guess you will be best off getting a bridge/short term loan and keeping the stocks intact. But I would echo others and pay for an hour of some CPA/tax attorney’s time and ask him/her the questions. Even 15% of $500,000 (if that is the gain) is a big number.

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Hi AJ, Thanks for all the info. Lots for me to sort through. All of our stocks have been held for many years so nothing short term to worry about. It would all be long term gains. I would sell the losers first, followed by the stocks with less gains… Right now, we are leaning toward the brokerage loan, for 3 or 4 years, and that would allow us to spread out the stock sales. Thanks for the tax rate chart. Thanks for all the great info. I appreciate it.

The loan that @footsox is looking at is a loan that’s secured by stock, not the new house. It’s actually a variable rate loan with an initial fixed rate for 3 years, and the fixed rate is currently lower than even conventional rate loans. Typically, bridge loans carry a higher rate than conventional loans, so it’s a cheaper option than using a bridge loan would be.

In FL, where @footsox lives, there are additional taxes and fees that are paid on mortgages that are not assessed on stock-secured loans, so that’s an additional savings.

All of that is why @footsox is looking at the stock secured loan.

AJ

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Thanks AJ for the information. It is all correct. We had spoken to a mortgage broker and he had us qualified for almost any loan we needed. (our credit scores are over 800). Then there would have been a mortgage origination fee… and at the last minute he said we would need to pay 1 point to get a good interest rate. This kind of came out of nowhere and did not make us happy. In addition, if you are getting a mortgage where we live, you have to pay I think 14 months of property taxes up front, at closing, and I think a year of insurance up front, and then, since it IS a mortgage, you pay monthly insurance and property taxes so it can accumulate with your mortgage company until it is billed once a year. With a simple loan based on our stocks, there is NONE of that. So, we will not have to pay upfront taxes and insurance, and not have to pay monthly taxes and insurance. It was a real game changer for us. You guys are so amazing to go through all this with me and point out so many factors and things to consider. I have been on the motley fool boards for years and it is by far the best group on the internet. My thanks and admiration to all of you.

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That’s called an escrow account, and with your credit scores, you probably don’t have to do this. You may have to pay an extra fee (usually 1/4 point), but you can have a mortgage originated without an escrow account - you just have to pay the taxes and insurance on your own. That’s what I did when I had my current mortgages on both my residence and my rental properties set up. Having worked for a mortgage servicer, and seen the mistakes that can be made with escrow accounts, I don’t ever want to have one again.

If you don’t want to pay the extra fee when you get the mortgage, you can get the mortgage set up with the escrow account, make on time payments for a while (usually at least a year) and ask that the escrow account be removed. The servicer doesn’t have to cancel the escrow account, but will often do so. If the escrow account is cancelled, you will get back all of the money that’s been held in the escrow account.

AJ

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