job transfer and new home: take out mortgage temporarily or sell investments?

[simple girl]

Hello!

Well, big changes in our future! Hubby has been able to work out a job transfer (will happen this summer sometime, date not firm yet) to Florida where we eventually want to retire! Woo-hoo!!!!!!

Soooooooo....we have been expecting this to happen (but not this fast!!!!) so I've been watching the market and working with a real estate agent since last fall. We suddenly found a property that meets everything we want, recently put an offer in, and got it. Woo-hoo!!!

Closing set for mid-June.

We are approved for a mortgage but haven't officially confirmed anything with any lender.

We have enough liquid assets for downpayment but the rest of our assets are tied up in 1) current home 2) rental property (both fully paid off). We'd like to sell both (tired of having a rental), but neither are quite ready for the market, and we aren't sure how long it will take to sell them. So, we don't know how long we will need to carry the mortgage on the new place. We can handle payments no problem, we just want to minimize the interest we have to pay.

We are trying to decide if we should go forward with the mortgage and pay the monthly interest charges until we sell our homes and can pay off the new property, or if we should sell some of our investments in our taxable account and avoid a new mortgage altogether. We definitely want to pay it off completely as soon as possible, but want to choose the best strategy to do so.

We are hoping to fully retire in 2018 and were planning to of course draw down from our taxable accounts first. So if we sold from taxable accounts we would be drawing them down considerably. If we did that we could re-buy once we sell our current properties. There are tax consequences to consider and of course the unpredictability of the market.

Hubby and I have different viewpoints on how this should be handled...please share your opinion(s) and what things we may want to consider that we haven't thought of, etc.

Thanks so much!

 

[MichaelB]

SG, there's a third option called a bridge mortgage or bridge loan. Its specifically designed for this purpose, cover a 6 month or so period between buying and then selling. The rates will probably be higher, but it still might be a good option when compared with the fees you pay on a new regular mortgage or taxes on the portfolio transaction.

 

[simple girl]

SG, there's a third option called a bridge mortgage or bridge loan. Its specifically designed for this purpose, cover a 6 month or so period between buying and then selling. The rates will probably be higher, but it still might be a good option when compared with the fees you pay on a new regular mortgage or taxes on the portfolio transaction.

Hadn't even thought of that and don't know anything about it - let me investigate! Thanks so much!!!

 

[ivinsfan]

You don't say where you live, but uphere in the Northland May 1 is primo selling time for homes. I'd call a real estate agent and ask about selling to get their opinion, getting "ready" for the market might not really be required.

 

[kaudrey]

I would opt for a bridge loan or mortgage, depending on your timing.

 

[eytonxav]

I would think the bridge loan route would be preferable. Not sure if a HELOC would provide you enough funds to complete your Florida home purchase, but that could be another form of bridge that might have more favorable rates (I am not sure of the rate differential between these two forms of loan).

 

[neihn]

I am in a similar situation, DW will move first to FL in August, I will commute from FL to OR for work until next summer then transfer to FL.

I need to be present at OR site to finish up my commitment with Megacorp. Hopefully, I can transfer next summer, deal need to be made

We get a new mortgage for the house in FL. We decide to keep the OR house and rent it out after I transfer to FL.

We will keep both houses until we are sure FL is home

 

[W2R]

I think my action speak louder than my words in expressing my opinion on this one. So, here's what I did:

When I bought my dream house last summer, I sold some mutual funds in my taxable accounts to pay for it and then paid in full, in cash, at closing.

Everything in both the buying and selling real estate transactions happened so fast - - it was a whirlwind. I needed to make an extremely strong offer on my dream home so cash seemed to be a good idea for me at the time, and closing was originally scheduled for May 29th (the sellers' preference), just 26 days after the contract was agreed upon. So, even though it was eventually delayed five times by the sellers and ended up on June 26th, still there was no doubt in my mind that a "need for speed" existed. The sellers were trying to close ASAP but had their own obstacles to hurdle. So, every week or two they amended the contract to delay closing another week. The constantly shifting closing date wasn't their fault, but it was so stressful. As an all cash buyer I could cope with it and I think that helped me to get the house.

Getting all packed up, getting the inspections done, jumping through all the other hoops, and so on, seemed like too much to accomplish in 26 days even without involving a mortgage company too. If I had a bridge mortgage, I would have had the added worry about what to do if my old house didn't sell. It sold in 4 days, but who knew? Not me, that's for sure.

I don't regret paying in 100% cash with no mortgage, not at all. I thought I would get clobbered at tax time but it wasn't that bad.

 

[simple girl]

Thanks so much for the input thus far.

We have an offer to get a 30 yr loan at 3.75% (a bit higher rate than ave rate right now) and they will give us a ~$1400 closing cost credit in exchange for accepting that slightly higher than average rate. I've looked at the Loan Estimate and that $1400 covers sections A (origination costs) and B ("Services you can't shop for - the amounts may vary by lender. These costs include the appraisal, credit report, flood certification and tax services.")

So this would cover all the lender fees, in exchange for a higher rate - unless I am missing something? There is no prepayment penalty. We would have to pay the interest for however many months until we sell our primary.

I am going to see if they will give us a similar closing credit for a slightly higher 15 yr rate.

Our contract spells out we have to do a conventional fixed or ARM - just recalled that. So if I am understanding the wording I think I need to go that route unless we sell taxable funds and do all cash.

The sellers were REALLY difficult to deal with, so after recalling that part from the contract, we've decided we don't want to attempt changing the type of financing (except I assume they wouldn't get upset if we proved we have the ability to pay with cash). They rescinded on a deal they had just accepted from us (with signatures!) before we had a chance to sign it because "another offer just came in".

So, anyone else besides W2R feel selling taxable investments is a better idea than financing via the above conditions? Thanks W2R! I can SOOOOO see why you did the all cash deal in a hot market.

 

[ivinsfan]

I wonder about your rental house, if you end up selling that quickly, that might be a taxable event as well. I think you give up a lot of wiggle room tax wise by not borrowing,
I'd just finance until the dust settles from the move and the houses selling. The regular financing not the bridge.

 

[Big_Hitter]

You can take out a heloc on the property you own. Helocs are cheap and usually have interest tied to a treasury rate with a low percentage minimum, like 4%

 

[Dash man]

Be aware of the tax consequences of selling the rental. Not only do you pay capital gains, but also have to pay the depreciation recapture which I believe is a set 25%. Getting out of the rental business is expensive.


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[simple girl]

Be aware of the tax consequences of selling the rental. Not only do you pay capital gains, but also have to pay the depreciation recapture which I believe is a set 25%. Getting out of the rental business is expensive.


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I know it is not going to be good when we sell it, just don't know how bad. That's a whole other can of worms. What do you do, hold it for the rest of your life? There has to be some kind of "most favorable" exit strategy. And do you have to pay those taxes at closing? I would have thought that gets handled when you file taxes.

 

[neihn]

Be aware of the tax consequences of selling the rental. Not only do you pay capital gains, but also have to pay the depreciation recapture which I believe is a set 25%. Getting out of the rental business is expensive.


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Hi Dash,

If I am selling my home in OR now and have about 300k capital gain, for a couple, I don't have to pay any capital gain.

If I am renting it out for a few years - then selling it - let's just say the capital gain is also 300k - do you know how much tax I am looking at?

Pondering about my options?

Thanks.

 

[Dash man]

There are few options, one of which is to hold it for the rest of your life. I'm moving mine to a management company to lessen the headaches. You can live in the property as your primary home for two years, then you can sell it without paying the recaptured depreciation and probably no capital gains. Or you can sell it and take the tax hit. No, you don't pay it at closing, but need to when you file your taxes.

 

[Dash man]

Hi Dash,

If I am selling my home in OR now and have about 300k capital gain, for a couple, I don't have to pay any capital gain.

If I am renting it out for a few years - then selling it - let's just say the capital gain is also 300k - do you know how much tax I am looking at?

Pondering about my options?

Thanks.

You have to live in the home for at least two of the previous five years to get the tax breaks on capital gains. The capital gains rate is typically 15%, but some pay 20% if you're in the highest tax bracket. You will have to pay the 25% depreciation recapture tax if you don't live in it for two of the previous five years unless you do a 1031 exchange and rent that property for at least a year before you live in it.

 

[simple girl]

There are few options, one of which is to hold it for the rest of your life. I'm moving mine to a management company to lessen the headaches. You can live in the property as your primary home for two years, then you can sell it without paying the recaptured depreciation and probably no capital gains. Or you can sell it and take the tax hit. No, you don't pay it at closing, but need to when you file your taxes.

Thank you. I will discuss with hubby. Perhaps we should keep it. Will research and reconsider.

 

[W2R]

The sellers were REALLY difficult to deal with, so after recalling that part from the contract, we've decided we don't want to attempt changing the type of financing (except I assume they wouldn't get upset if we proved we have the ability to pay with cash).

Good idea. At least, in the New Orleans real estate market last summer, it seemed to really help to try to placate the sellers in any reasonable ways.

They rescinded on a deal they had just accepted from us (with signatures!) before we had a chance to sign it because "another offer just came in".

So, this is another deal with the same sellers? Wow, things sound pretty hot there, too.

So, anyone else besides W2R feel selling taxable investments is a better idea than financing via the above conditions?

My late mother always said, while rolling her eyes, "oh W2R, you just HAVE to be different, don't you? " But anyway that was the path I chose.

Thanks W2R! I can SOOOOO see why you did the all cash deal in a hot market.

Thanks. You will be so glad when all of this is over, and you are all moved in. All the effort and issues and work to make this real estate transaction happen, will turn out to be so worthwhile.

 

[DrRoy]

I would not want to sell investments, especially if there was a tax consequence. I would go for a loan, but no points and minimal other fees.

 

[simple girl]

Good idea. At least, in the New Orleans real estate market last summer, it seemed to really help to try to placate the sellers in any reasonable ways.

So, this is another deal with the same sellers? Wow, things sound pretty hot there, too.

Yes! It is a very hot market. 3 different offers all within 2.5 days (if they aren't lying - I am suspicious...the agent is the sellers' daughter...who knows) The ante kept being upped and multiple times we were told we had 30 minutes to make a decision. I was ready to walk away as I hate feeling manipulated! But we didn't walk, and calmed down enough to make our "best and final" offer - and they accepted. Then they wanted to know if they could wait until morning to get their signatures in. Ba ha ha I don't think so!!!

Thanks. You will be so glad when all of this is over, and you are all moved in. All the effort and issues and work to make this real estate transaction happen, will turn out to be so worthwhile.

Thank you so much for that encouragement!!!!!! Really need it after all this stress! It's the perfect property for us, I can just feel it!

 

[neihn]

You have to live in the home for at least two of the previous five years to get the tax breaks on capital gains. The capital gains rate is typically 15%, but some pay 20% if you're in the highest tax bracket. You will have to pay the 25% depreciation recapture tax if you don't live in it for two of the previous five years unless you do a 1031 exchange and rent that property for at least a year before you live in it.

I lived in my OR home for 22 years, and own it out-right (no mortgage), therefore, if I sell it now I would not pay any capital gain.

But if I rent that same house out for few years then sell it, do I still have to pay 15%-20% capital gain tax?

If that is the case, perhaps I should sell my home instead of rent it out.

 

[Dash man]

You have to have lived in the home as your primary home for two of the previous five years. Sell it within five years and you're okay, though you may have to pay recaptured depreciation for those few years you rented it. Check the IRS site for that.


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[neihn]

Thanks Dash man. I will check out the IRS document.
Since the house is paid off - there is no interest pay for rental deduction/depreciation. All the rental income could bump me up to a higher tax bracket (ie > 15%)

It seems I am better off sell the OR home next year.