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When you’re buying a house, your down payment is a big deal. What you can afford to pay upfront has significant bearing on how much house you can afford, and a higher down payment means a lower monthly mortgage payment. Many people consider selling stock for a down payment.
While selling stock to buy a house is often a safe and even smart move, you shouldn’t do it without understanding the tax implications. It’s scary to sell off part of your stock portfolio, even if it’s for another significant investment. If you’re considering selling stock to fund your home purchase, we’ve put together a guide to help you understand how and when to liquidate your holdings, and what you need to consider going forward.
Why would you sell stock to buy a house?
The 2022 U.S. housing market has been and will be red-hot. In a seller’s market, buyers have to work every advantage they can to get their dream home. One such advantage is a large down payment.
A big down payment will lower your monthly mortgage payment, but by lessening the total mortgage amount, it mitigates the lender’s risk. That security looks good to a seller and can serve as an advantage in a competitive bidding war. If selling some stock can get you up to 20% of the home’s purchase price, it’s a great help.
What to consider when selling stock to buy a house
If you do decide to sell stock to increase your down payment, don’t just sell and be done with it. There are a number of important factors to consider.
1. When you decide on a house, sell immediately
Once you’ve assessed your tax liabilities, signed a purchase contract, and gotten your financing approved, don’t delay in selling off the stock you need. Things change fast in the stock market and it’s an awful feeling to set aside a few thousand shares to cover your down payment only to see those shares lose 5% of their value before you liquidate.
Unless you’re a very conscientious, attentive trader, you don’t know what will happen to your stock in the time between signing the contract and your closing date. All it takes is one bad quarterly report to tank a portion of your down payment. So don’t delay until the closing date; once you’ve signed the contract, sell your stock to guarantee you have the agreed-upon down payment ready.
2. Understand the tax implications
Sure, you can technically sell any stock to get your down payment, but not all stocks carry the same tax ramifications.
The IRS taxes capital gains in two ways: long-term capital gains and short-term capital gains. Investments held for more than a year are long-term capital gains and taxed at a much lower rate than ordinary income. (Note: They are not taxed at all if your marginal tax rate is 15% or lower.)
Short-term capital gains are taxed at the same rate as your marginal tax bracket. If you’re in the 28% tax bracket and sell a stock you’ve held for less than a year for a $5,000 profit, you’re subject to $1,400 in capital gains tax. Hold it for more than a year, it would be only $750. That’s a huge difference and an important point to consider when selling off stock for a down payment. Long-term holdings are usually preferable, even if short-term ones have profited more.
That said, even losing positions can work in your favor. The IRS lets you use investment losses to reduce your taxable capital gains so if you had a bad year, it doesn’t have to kill your ability to sell stock to buy a house. You can write off up to $3,000 in investment losses to reduce your taxable income for a year. Any amount over $3,000 can be carried over to the next year, which can actually boost your refund. In an odd way, selling off stock losses can help you get the money for a down payment and give you a boost in next year’s tax season.
3. Be selective about what you sell
Avoiding brutal capital gains taxes is important, but that doesn’t mean you should only sell long-term holdings. Consider why you purchased specific stock in the first place. Did you buy for the long-term potential or because they were safe?
Most people construct portfolios with a balance between long-term safe stocks and bonds and short-term, riskier ones. Of course, it’s different for every portfolio, but selling off those long-term, safe holdings is a good idea not just because of the capital gains benefit. If you have shares in an established company whose stock doesn’t fluctuate much, you have a great chance to sell now and buy again at the same or similar price. It’s not like you’re selling Apple in 2001.
While some stocks in futuristic industries like self-driving cars or green technology may be volatile and concerning right now, they still likely have more growth potential than an entrenched stock like Johnson & Johnson.
Analyze your portfolio, understand what qualifies as “long-term” and “short-term” and make an educated decision to sell off stocks you can probably buy again at a reasonable price.
Alternative down payment options
Not everyone will have the stock assets to justify selling off to support a down payment. That’s okay, there are alternatives; especially if you’re a first-time home buyer.
Through Federal Housing Administration mortgage programs, first-time home buyers can get a mortgage for a down payment of as little as 3.5% of the home’s price. Mortgage giants Fannie Mae and Freddie Mac also offer 3% down payment conventional loan programs for first-time home buyers. A 3% down payment on a $300,000 home is just $9,000. You may not have to sell any stock to get to that number.
The trade off, however, is that your monthly mortgage payment will be very expensive. Between mortgage insurance, a higher loan balance, and a likely higher interest rate, your monthly payment may be daunting. Using the $300,000 example, a 3% down payment at 4% interest with mortgage insurance would cost more than $1,400 per month. A conventional loan with a 20% down payment (and, therefore, no mortgage insurance) would come in around $1,100 per month.
In other circumstances, you may also qualify for programs like USDA loans or VA loans which require no down payment. However, each program has stringent requirements and, again, will carry higher monthly payments than a conventional loan with a 20% down payment.
Different home buyers have different priorities, so while selling stock for a down payment is a great option for some, others may prefer to look at alternative loan programs.
Is selling stock to buy a house a good move? In most cases, yes. But if you do decide to sell stock for a down payment, make sure you’re selling the right stock and that you understand the tax implications. Otherwise, there are other options — especially for first-time home buyers — to buy a house without a lot of upfront money.