using mutual funds to buy a home
I have enough money in mutual funds to be able to pay a 40% downpayment on a property costing $800,000. Only, I’m terribly afraid that cashing in my mutual funds in order to do this will leave me with capital gains taxes that will run me to bankruptcy. My income is very modest (slight, one…
I have enough money in mutual funds to be able to pay a 40% downpayment on a property costing $800,000. Only, I’m terribly afraid that cashing in my mutual funds in order to do this will leave me with capital gains taxes that will run me to bankruptcy.
My income is very modest (slight, one might say), and my savings aside from mutual funds are not gigantic either. It seems absurd that I wouldn’t be able to use this large amount of money I have in mutual funds to purchase real estate, but the tax implications seem to be the main drawback.
Does anyone know if there are tax breaks for first time homebuyers which might protect me from capital gains taxes up the wazoo? Or is there some better way to approach this issue? To have money in the bank that’s essentially untouchable because of taxes seems a great shame.
Thanks.
You’re part of the club that thinks that your cash needs to return 20% a year risk free before tax?
There should be a reason you can’t buy a house with your mutual funds: the reason is that the funds are much more risky than cash. If the market goes down, and your (slight) income can’t meet the mortgage, the bank is left holding the bag because the mutual fund might be down 20%.
So either cash out of your (risky) mutual funds and put it in a house, or don’t buy a house. You can’t have both. If you can, then there is something wrong with the financial system it is undervaluing risk and there will be a crash!
Slight/modest income but mutual funds of over $320,000? Wow… that is.. relative.
If you have investments that have lost value, you can sell those too, so that the capital losses offset the capital gains. Having said that, don’t accept financial advice from anonymous posters on a blog! Everyone is being very helpful in making what sound like good suggestions, but it’s not the way to make important financial decisions.
My advice is to try and keep liquid assets of at least 100k. Given the uncertainty of the real estate market in general, you want to make sure you have substantial liquid holdings if the worse happens — real estate crash, major recession, terrorist attack, whatever.
Never put all your eggs in one place, and that includes your home.
But that said, I agree you should talk to a financial planner about your tax concerns. Taxes have to be paid eventually, unless you never spend the money and leave it to your heirs. Buy a home seems like as good a time as any to pay them, espcially considering the currently low 15% long term Federal gains taxes.
If you can swing the payments, you may be able to find a lender who’s willing to hold your mutual funds holding as additional collateral on the loan, meaning you don’t have to make a down payment at all. (If you have $350K in mutual funds plus your $800K house as collateral, you could presumably get a $850K loan to buy the house and pay the closing costs.)
The 15 percent capital gains rate is just Federal. Capital gains are taxed as income for state and local purposes. In other words – your total tax rate on a capital gain is about 33 percent. Also – a large capital gain may cause the Alternative Minimum Tax to kick in. Speak to a tax advisor!
It could be worse: in 1995 when I sold my condo in Manhattan, it sold for less than my mortgage and had to sell mutual funds to pay off the mortgage and for the closing costs. I had to pay taxes on the gain on the sale of the stocks but could not deduct the loss on the condo. That sucked all around.
Taxes are a fact of life. If you want to buy a new home, you have to bite the bullet and realize gains and pay the taxes on them. The alternative is to avoid the taxes and keep renting.
Consider putting down less money and then getting a home equity line of credit to fund emergencies so you don’t have to touch the savings again. I know Chase periodically offers these with no closing costs and reasonable interest rates.
It’s a good question. Don’t know of any specific tax breaks (unless you want to move a sports team into Brooklyn) but you could avoid a little of the taxes by putting less down – check whether your rate changes if you do that – and instead of reinvesting any dividends from your mutual funds, use the dividends to augment your mortgage payments if need be.
Of course, you should confirm this with a financial advisor, but I don’t think there are special tax incentives for this type of situation. As the previous poster stated, the capital gains taxes vary depending on how long you held the stock, but you still have to pay them.
I’m assuming you want to put ~40% down to keep your mortgage payment lower, which is not a bad thing, especially if you intend on living in your home for the next few years.
Regardless of whether you cash your funds in now, or later, you will still have to pay capital gains. If you really want to live in this home, then why not suck it up and do it now! Just subtract the correct percentage from the total, and subtract 3% for closing costs, keep a bit on the side for emergency savings, and move on in!