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Should I Sell Off Taxable Investment Accounts for Future Real Estate Purchase?
Old 05-07-2011, 05:09 PM   #1
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Should I Sell Off Taxable Investment Accounts for Future Real Estate Purchase?

I was just wondering what you thought of this. I currently rent, but will purchase a primary residence in the next three to six years. I have taken a look at the values in my taxable investment accounts around February of 2009 (an investment portfolio low point for me) and compared them with the value today. There exists a significant increase in value.

Do it make sense for me to sell off these taxable investment accounts so that I could put the gains into something more safe- say the Vanguard Short Term Bond Fund? Then, when I make the real estate purchase in the next three to six years, I will be able to pay for most of the property, if not all of it, in cash? I figure everybody needs somewhere to live, and you are either paying rent or paying off a mortgage. If I can purchase a residence with cash, then my retirement budget will be reduced significantly because a major expense (housing) will already be paid for.

Someone who knows more about investing than me suggested that I stay away from my tax deferred/tax exempt (401k, Roth IRA, etc) accounts and focus on the taxable accounts if I am going to take this course of action.

I am thinking that housing prices will not rise significantly in three to six years, but I am not sure that the gains I see today in my taxable accounts will necessarily still be there three to six years from now. That is why I thought it might be a good idea to lock into those gains now.

I know that if I do sell off these taxable investment accounts, my asset allocation will completely change, and I will need to make necessary adjustments moving forward to get it back on track. Also, does it make any difference from a tax perspective, if I sold all of these taxable investment accounts in one year or if I spread it out over two or more years?

Thus far, I have only added to these taxable investment accounts, so the idea of selling them is somewhat unusual to me.

Thank you for your advice.
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Old 05-07-2011, 07:08 PM   #2
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I am looking at purchasing rental property, since I think real estate is looking like bargains in some parts of the country.

What you are trying to do is quite tricky, timing both the bottom of the real estate market and the top of the equity market. Best case in the next three years housing price continue to stay flat to go down, and stocks drop. Worse case housing prices go up as does the stock market and you are really screwed. Given your time frame is pretty far away 3-6 years I suspect that worst case is more likely than the best case.
Since historically both real estate and equities price are far more likely to appreciate over a 5 year period than depreciate.

Now if your time frame for buying real estate was 6 months or even a year. I would definitely suggest moving the money into a short term bond fund or money market. I reasonable compromise might be to redirect any future saving into a money market/CD while leaving your existing portfolio alone until you get closer to making a real estate purchase.

Out of curiosity why are you waiting so long to buy a house?
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Old 05-07-2011, 10:45 PM   #3
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Quote:
Originally Posted by clifp View Post
I am looking at purchasing rental property, since I think real estate is looking like bargains in some parts of the country.

What you are trying to do is quite tricky, timing both the bottom of the real estate market and the top of the equity market. Best case in the next three years housing price continue to stay flat to go down, and stocks drop. Worse case housing prices go up as does the stock market and you are really screwed. Given your time frame is pretty far away 3-6 years I suspect that worst case is more likely than the best case.
Since historically both real estate and equities price are far more likely to appreciate over a 5 year period than depreciate.

Now if your time frame for buying real estate was 6 months or even a year. I would definitely suggest moving the money into a short term bond fund or money market. I reasonable compromise might be to redirect any future saving into a money market/CD while leaving your existing portfolio alone until you get closer to making a real estate purchase.

Out of curiosity why are you waiting so long to buy a house?
I have a work situation that could cause me to relocate on multiple occasions over the course of the next few years.

I like your suggestion about a reasonable compromise- directing any future savings into a money market/CD while leaving my existing portfolio alone until I get closer to making a real estate purchase.

Thank you for the advice.
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Old 05-08-2011, 05:59 AM   #4
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It depends on all of the detail about your particular situation.... and no one knows it like you.


Do some projections for different scenarios using realistic assumptions. That may help you make a decision.

I believe there could be good reasons for paying it off or carrying the mortgage.

When we bought our current house, I could have paid cash. But, instead I paid about 40% down and got a 15 year loan.... At that time, we were about 11 years from planned FIRE. we wound doing a couple of refis to lower our rate. I increased the monthly payments to pay that loan off early... In the end, I wound up paying just paying it off with a lump sum payment about 8.5 years into the loan... after the meltdown happened.


We had a goal to be out of debt when we FIRED.
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Old 05-08-2011, 10:21 AM   #5
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You didn't say your age but I'll assume you're a reasonable distance from 59 1/2. If true, I agree you shouldn't consider tapping into tax deferred accounts.

The "classic" approach to any defined time frame expense (college or home purchase) is to become more conservative as the deadline approaches. I would suggest you have a block of assets that you transition from all equities to all cash in even annual increments. If you have 5 years to go you'd be 100% equities. Every year you'd be 20% more in bonds (maturing in year 0).

Before paying cash for a house even if you think you can afford it, make sure you aren't depleting your after tax cash so you won't have an extensive asset base in case of job loss or disability. You can always pay off a house faster; but if your income is impacted, it's very hard to get money out of a house without selling it.
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Old 05-08-2011, 10:41 AM   #6
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You didn't say your age but I'll assume you're a reasonable distance from 59 1/2. If true, I agree you shouldn't consider tapping into tax deferred accounts.

The "classic" approach to any defined time frame expense (college or home purchase) is to become more conservative as the deadline approaches. I would suggest you have a block of assets that you transition from all equities to all cash in even annual increments. If you have 5 years to go you'd be 100% equities. Every year you'd be 20% more in bonds (maturing in year 0).

Before paying cash for a house even if you think you can afford it, make sure you aren't depleting your after tax cash so you won't have an extensive asset base in case of job loss or disability. You can always pay off a house faster; but if your income is impacted, it's very hard to get money out of a house without selling it.
Transitioning assets from equities to cash in even annual increments makes sense to me. Also, making sure that I have a sufficient emergency fund, in the event of a job loss or disability is good advice too. Even though it might feel good to have a residence paid off, it seems more prudent to make sure there is a fund available to pay necessary fixed costs of living, if I were laid off from work. Like you said, it's not easy to "pull" money out of a house without selling it. Thanks.
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Old 05-11-2011, 08:32 AM   #7
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OP - I'm in the same boat as you except I'm one year out. A few years ago I moved a significant portion of taxable equity funds (for the large down payment on the house to be built next Spring) into a taxable VG short-term bond for the same reasons you mentioned. I realized the capital gains at the time and paid the incremental tax. While I could pay cash for the house, I'll probably carry a small mortgage for the first year or two, then pay off the mortgage with a combination of taxable and tax-deferred funds. Good luck and good foresight on your part. I think spreading the conversion over the next few years is the best course of action.
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