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Tax considerations of liquidating part of portfolio/Margin Loans
Old 12-10-2013, 03:53 PM   #1
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Tax considerations of liquidating part of portfolio/Margin Loans

Sell equities due to potential home purchase

As you may recall, I am thinking of purchasing a home in the spring. I posted in the thread above about liquidating part of my portfolio to cover for a down payment. As it stands now, only about 2.5% of my non-retirement portfolio is cash. Most of my gains (no losses) are not long term until the last week of March and first week of April 2014. With the hindsight that I’d buy in May of 2014, perhaps I may not have invested in so many securities in 2013. However, the short term gains as of today represent 12.7% appreciation on my cost basis.

In talking with my accountant, my net federal (28%) and state (5%) tax due on short term gains is 33% (ordinary income). If I can wait until the gains are long-term (late March/early April), the gains become long term….and the tax due would be 15% (federal) and 5% (state). This represents a delta of 13% between short term gains and long term gains, if I wait until April to sell.

He also suggested looking into borrowing cash from my broker on margin by leveraging my brokerage account balance. This seems a viable option, as I can repay the money quickly once the gains become long term. However, if the market tanks, it appears there are inherent risks in borrowing on margin, which could cause a domino effect.


It seems to me my options for raising cash needed for a potential May 2014 closing date are as follows:


1. Sell securities while the market is still doing well, and I still have unrealized gains. Pay the 33% net tax (13% more if I had waited), and count my blessings that I have the cash ready for downpayment. Looking at it from the “glass is half full” perspective, my net-after tax gain (if I sold today) would still be 8.5% for the year on shares sold.
2. Take the risk to wait until first week of April to sell. Pay 20% net tax (13% less than selling now). Potentially ride an even more up-climb in Q1 2014, and make out better from a tax perspective, too.
3. Look into the margin loan. Vanguard’s rate appears to be around 6.5% APR charged daily, (so about 0.54% a month). I need to do more research on this as it appears there are tax deductions on the interest paid. However, if the market tanks in the 1 to 4 month time frame that I need the cash, it seems this option might not be great.
4. Do nothing now, and wait to see how the market shakes out in Q1 2014. If things are neutral/positive, and it looks like I can sell in early April 2014 without big losses, then sell and buy a place. If the market’s bad, then wait and rent another year. However, this delays my buying for another year and subsequently having to deal with likely higher interest rates in 2015.

Thoughts? Comments? What would you do??
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Old 12-10-2013, 05:24 PM   #2
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I would probably do #4. But then I am something of a perma-bull. And I despise the idea of paying tax on short-term gains.
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Old 12-10-2013, 06:11 PM   #3
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I wonder if you could buy a put with a strike close to the current market price that expires shortly after your holding period is done. If the market tanks then you have the gain on the put to protect you economically. If the market stays level then (I think) the cost of the put would be less than your tax savings so you would come out ahead. If the market goes up then your tax-advantaged gain would get bigger and you could deduct or take a loss for the cost of the put.

Just check the tax implications as I don't recall how that works.

Alternatively, you could put in stop loss orders at a price somewhat below the current price if you want to protect the gains.
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Old 12-10-2013, 08:37 PM   #4
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I'd probably sell some each month for the next year or so, given that the market still looked OK. You can easily lose 13% just waiting for long term gains, so I wouldn't let short term gains freeze you in your tracks. Of course, if the gains evaporate you would be able to get your money out without any taxes or maybe even pick up some losses. So start taking some profit now (better interest rate than an online savings account), and keep doing so unless the gains start to disappear. If that happens, you're out with no tax gain worries.
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Old 12-11-2013, 05:38 PM   #5
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Bump.....anyone else care to share their input?
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Old 12-11-2013, 06:43 PM   #6
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I wouldn't get leverage by going out on margin. Personally I'd question the sanity of anyone advising me to use margin (other than requiments if you want to play options). Thats just me, others may see it different.
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Old 12-11-2013, 06:53 PM   #7
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If you are absolutely sure you are ready to buy that home, I would sell now.

33% x 12.7% / (1+12.7%) = 3.73%.

So you lose 3.7% of your current investment value to Uncle Sam by selling now. The market can inflict more damage than that in a single day.
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Old 12-11-2013, 07:44 PM   #8
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You took a risk in saving for a down payment with equities. Many would say that those savings should have been in riskless accounts. So really you are ahead of where you would be had you been prudent. Why can't you rent for a few more months? The landlord will most likely be happy to extend it awhile.
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Old 12-12-2013, 08:44 AM   #9
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I would probably do #4. But then I am something of a perma-bull. And I despise the idea of paying tax on short-term gains.
+1
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Old 12-12-2013, 10:08 AM   #10
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Originally Posted by younginvestor2013 View Post
...
He also suggested looking into borrowing cash from my broker on margin by leveraging my brokerage account balance. This seems a viable option, as I can repay the money quickly once the gains become long term. However, if the market tanks, it appears there are inherent risks in borrowing on margin, which could cause a domino effect.


It seems to me my options for raising cash needed for a potential May 2014 closing date are as follows:
...
Since you are young you haven't lived as an investor through something like the 1987 crash. Do yourself a favor and read up about it.

Look at the daily changes that occurred in October 1987 (link: ^GSPC Historical Prices | S&P 500 Stock - Yahoo! Finance). Could you survive that? If so you are safe, if not margin is not for you.

BTW, that period was about 5 years into a recovery, we're almost there now. To me this is a litmus test for investor stomachs. This was in my opinion a pure market panic.
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Old 12-12-2013, 10:51 AM   #11
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I don't know enough about your situation to know if this is a viable option, but if I were in your shoes, I would favor a fifth option, which I don't see mentioned in this thread:

5. Using the funds in your retirement account(s), immediately transfer enough for the down payment from equities into a no risk/low risk option. When the equities in your taxable account become long term next year, sell enough for the down payment from your taxable account and simultaneously repurchase equities in your retirement account.

The advantage of doing this is that you are taking risk off the table without incurring a large tax bill. From an investing point of view, you get the same asset mix as if you immediately sold equities from your taxable account, but with the added benefit of avoiding short term capital gains.

Of course in order to make this work successfully, you need to have a retirement account that's at least as big as your planned down payment, and you also need to be able to make up any shortfall from your taxable account, should stocks tank before your gains become long term and your taxable account shrink to the point where it no longer is large enough to make the down payment.
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Old 12-12-2013, 11:34 AM   #12
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I don't know enough about your situation to know if this is a viable option, but if I were in your shoes, I would favor a fifth option, which I don't see mentioned in this thread:

5. Using the funds in your retirement account(s), immediately transfer enough for the down payment from equities into a no risk/low risk option. When the equities in your taxable account become long term next year, sell enough for the down payment from your taxable account and simultaneously repurchase equities in your retirement account.

The advantage of doing this is that you are taking risk off the table without incurring a large tax bill. From an investing point of view, you get the same asset mix as if you immediately sold equities from your taxable account, but with the added benefit of avoiding short term capital gains.

Of course in order to make this work successfully, you need to have a retirement account that's at least as big as your planned down payment, and you also need to be able to make up any shortfall from your taxable account, should stocks tank before your gains become long term and your taxable account shrink to the point where it no longer is large enough to make the down payment.
+1. That's another good possibility.
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Old 01-25-2014, 11:40 AM   #13
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An update on this situation:

I have an offer out on a bank owned condo. If it goes through, it will be about 18% lower than the most recent comp in the building.

They are proposing a March 14 close date, and my attorney says the bank won't stretch it past that.

I therefore will likely have to liquidate for the 20% downpayment before my gains will be long term. The only other option is to see if my family could cover my downpayment money and I could pay them back once my gains become long term.

What do you guys think I should do? The market dropped almost 2% last week.

Should I sell the amount necessary next week and call it a day, being happy that I gained so much last year (and end up paying short term gains)?

Should I wait to see if I can get the 2% back that we lost last week, and sell whenever that happens, whether long term or short term gains are relayed?

Should I ask my family if they can cover the DP in cash, then sell when my gains are short term (even with the risk that the market may very well be much lower than it is now by April/May)?

It seems these are my main options.

Or I can pursue the margin loan against my portfolio.
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