Buy new house before selling the old one

[Peter]

Making a offer on a new house raises the question of where the money comes from.

[SIZE=-1]Suppose I sell stocks from my taxable account. Capital gains tax will of course be payable. The funds released would be applied to a cash offer on the new house. After the old house sells, I'd reinvest in taxable account stocks to get back to the original AA.

Assuming that, even without this transaction, those stocks would be sold eventually, I would essentially be paying capital gains tax in advance, but the long term result would be the same.

Am I missing something here? [/SIZE]

 

[MichaelB]

An option is a bridge loan using the stocks as collateral.

 

[PaunchyPirate]

Making a offer on a new house raises the question of where the money comes from.

[SIZE=-1]Suppose I sell stocks from my taxable account. Capital gains tax will of course be payable. The funds released would be applied to a cash offer on the new house. After the old house sells, I'd reinvest in taxable account stocks to get back to the original AA.

Assuming that, even without this transaction, those stocks would be sold eventually, I would essentially be paying capital gains tax in advance, but the long term result would be the same.

Am I missing something here? [/SIZE]

It's valid thinking. Except you might be paying MORE capital gains taxes now than you might if you sold the stocks in the future when your earned income was lower (or non-existent). If that situation doesn't apply to you, then I think your thinking is valid.

I bought my current home before my previous home was sold. I used some savings to pay down about 30% of the new house at purchase and took out a mortgage for the rest. Then once my old house sold, I paid off the mortgage (6 months) after taking it out. Yes, I paid closing costs this way, but I didn't have to sell any investments.

 

[38Chevy454]

X2, look into a bridge loan.

 

[Ginny]

We used our Roth IRA for a down payment and set up the IRA payouts to qualify for the loan. We sold our old house about 4 months later. We are retired and were when we purchased the new home. It may be a good time to sell stocks, but I would avoid it if there were other options.

 

[OldShooter]

An option is a bridge loan using the stocks as collateral.

Schwab has a standard loan offering for this purpose called "Pledged Asset Line" with rates from 4.5% over LIBOR to 1.5% over LIBOR depending on the size of the loan. Not great rates IMO but survivable for short periods. I'm sure many other brokers have something similar. These should be pretty fast to set up.

 

[Happyras]

Well, here is some insight....
In 2007 we bought a home (more than $1M) prior to selling the current home (>$1M). We were sooooooo lucky we did not get ruined. I considered taking out our investments (which would have been optimum in 2007), but no, our "accountant/adviser" said not a good idea to pull it out.
So, Washington Mutual, in their wisdom gave us HELOC on both the new and old property AND financed the new property.
So there we were fully leveraged in both properties so we decided to blow $20K on a Euro vacay for the entire family, why not?

When our prior home did not sell, we put another chunk into replacing the roof (a very large roof 6,000 sqft home!) By fall after two offers flipped, we were a little concerned, but lucky us sold and all was good.

So, looking back, the market crashed for both stocks and housing and we barely got through the bad choice of buying before selling. We would never do that again!

 

[travelover]

You can take the money out of an IRA and replace it within 60 days with no taxes or penalties. Needless to say, this is risky, but if you have a sure thing it might be an option.

 

[Aerides]

How hot is the market on your "old" home? Perhaps put an offer on the new, ask for 60 days to close, and then list yours - you might even find you have to rent somewhere for a few weeks in between.

Many areas of the country are seeing a surprisingly hot market right now.

 

[Happyras]

You can take the money out of an IRA and replace it within 60 days with no taxes or penalties. Needless to say, this is risky, but if you have a sure thing it might be an option.

Yup, that is what I wanted to do, but the greedy fee hungry adviser thought that was a poor choice (of course). In retrospect, even if we had paid taxes on the WD, we would have been way ahead due to the crash.

 

[MichaelB]

Schwab has a standard loan offering for this purpose called "Pledged Asset Line" with rates from 4.5% over LIBOR to 1.5% over LIBOR depending on the size of the loan. Not great rates IMO but survivable for short periods. I'm sure many other brokers have something similar. These should be pretty fast to set up.

Yeah, bridge loans don’t have the best rates but they are convenient for this purpose and sure beat paying capital gains taxes only to reinvest.

 

[Peter]

Thanks for all the responses.

What I'm trying to do is to set up funds so that when the right place appears we can go straight in with a cash offer. For that reason a bridge loan or first mortgage isn't ideal, since as I understand it, you start paying interest as soon as the funds are released. And it could be months or years before the right place shows up.

The problem we seem to be facing is that many banks have cut back on all lending. I'm currently working with a local credit union to set up a HELOC, but it's not yet a done deal. I've had refusals from BoA, Chase,Wells Fargo and Quicken Loans. It doesn't help that we are both retired and hence have no salary income.

Several brokerage firms offer credit lines based on invested assets, essentially margin loans used for cash draw, rather than purchase of securities. But the maximum draw is typically 50% of assets, whereas I could get 100% just by selling. I agree with everyone who says this isn't desirable, but it might be an acceptable backstop if all else fails.

Thanks again for all the suggestions. I hope the above doesn't sound as if I'm ignoring advice; not my intention at all!

 

[WhenIsItTime]

Depending on invested assets to liquidate, risk is market goes up while you are out and miss upside. Safe to say sitting out any 30+ days in last 6 months would hurt.

 

[kcowan]

We bought and sold in 2019. Needed to sell some stocks, then get a short term margin loan to bridge the cashflow. It worked out well.

 

[latexman]

You can take the money out of an IRA and replace it within 60 days with no taxes or penalties. Needless to say, this is risky, but if you have a sure thing it might be an option.

It works. I rolled an old Fidelity 401k into a new Fidelity tIRA with the check coming to me first. The timing was crucial. There were no delays and things worked out. I had about 30 days to spare. Fidelity acted like it happens all the time.

 

[RunningBum]

Two things you might be missing:

1) You might have a window later when you pay 0% on some capital gains, and you might get pushed into an extra 3.8% with NIIT, or even into the 20% cap gains on some of the gains.

2) You might never have to pay that cap gains. Your heirs get a stepped up cost basis on your assets. That may change, but it has been the law for quite a while. Or you might chose to donate appreciated funds to charity. I got a full write off on the value of some stock funds by putting them in a Donor Advised Fund, and no one had to pay the tax on the cap gains.

If you are looking to do this in 2021, you might sell half this year and the other half next year, to split the cap gains over two years, if that makes a difference like reducing NIIT.

 

[W2R]

Thanks for all the responses.

What I'm trying to do is to set up funds so that when the right place appears we can go straight in with a cash offer. For that reason a bridge loan or first mortgage isn't ideal, since as I understand it, you start paying interest as soon as the funds are released. And it could be months or years before the right place shows up.

Exactly. I don't think there is a perfect way to get around this problem. Here's the admittedly imperfect approach that I used when I bought my "Dream Home" back in 2015:

2012-2015: gradually raised the amount of cash in my taxable portfolio, by selling funds gradually while I was looking for my Dream Home at a leisurely pace. Wanted the right home, didn't want to rush, didn't want to touch my tax sheltered investments since my portfolio leans heavily towards taxable investments.

May, 2015: made an all cash offer on my Dream Home. Started packing.

June, 2015: closed on it. Sold more funds since my cash stash was a bit too small. (Guess I found the right house too fast! ).

July, 2015: moved, unpacked my stuff, got my previous home ready to sell

August, 2015: sold my previous home in cash, replenished my portfolio

October, 2015: with the help of Mr. Market, portfolio had return to its highest prior value despite the fact that my Dream Home cost more than I got for my prior home.

My income tax for that year was higher but nowhere near as bad as I had feared. YMMV, but in my case I had ZERO regrets about paying a little more income tax that year, to get the home I had longed for, for my entire life. I still can hardly believe how fortunate I am, every morning when I awaken to re-discover that I am now living in this wonderful home. It's not big or fancy but it is just right for me.

I guess that what I am trying to say, is that even if you go about things in an imperfect way, as I did, time passes by quickly and you will be enjoying life in your new home too much to fuss about it.

 

[Peter]

Two things you might be missing:

1) You might have a window later when you pay 0% on some capital gains, and you might get pushed into an extra 3.8% with NIIT, or even into the 20% cap gains on some of the gains.

2) You might never have to pay that cap gains. Your heirs get a stepped up cost basis on your assets. That may change, but it has been the law for quite a while. Or you might chose to donate appreciated funds to charity. I got a full write off on the value of some stock funds by putting them in a Donor Advised Fund, and no one had to pay the tax on the cap gains.

If you are looking to do this in 2021, you might sell half this year and the other half next year, to split the cap gains over two years, if that makes a difference like reducing NIIT.

Thanks, excellent points. NIIT will rear its head anyway, due to capital gains on the present house. Fortunately (or not!) we will not get close to the 20% cap gains threshold.

Stepped up basis for a surviving spouse is something I hadn't considered. Definitely a reason to avoid selling from taxable, only to reinvest later.

Hmmm ....

 

[doneat54]

Well not quite the same as your situation, but you may gather some insights from what we did last year, in this thread:

https://www.early-retirement.org/forums/f28/financing-2nd-home-with-401k-97731.html

In our case, DW is still working with a strong salary, so pulling from the portfolio to make it all work comes with a fierce tax sting. Even though we could easily take from it and barely move the needle, tax wise, it made no sense. We ended up getting a HELOC on our primary property to make payments (or augment payments) on the second mortgage. Good news for us is that we signed a P&S on our third property (no mortgage, bought 26 years go) this past Sunday, so the modest HELOC balance since last summer will get paid off soon and we'll be left with a comfortable post tax (after paying the cap gains on that property) cash cushion and some money to put into the other 2 properties.

 

[Peter]

Well not quite the same as your situation, but you may gather some insights from what we did last year, in this thread:

https://www.early-retirement.org/forums/f28/financing-2nd-home-with-401k-97731.html

Thanks, I do remember that thread. It makes an interesting read in our present situation.

 

[ERD50]

Is there a reason you wouldn't just get a mortgage (not just a bridge loan) on the new home? I would think you could qualify if you have the resources to buy new w/o selling the old. It would save you the cap gains, and rates are low now. You could pay it off/down when you sell the old home, if that's what you want.

-ERD50

 

[KenZ71]

Some may call this financial blasphemy

Bought new house September 2020, used 60 day IRA rollover for down payment. 48 hours after close used a credit card with insanely huge limit and equally insane balance transfer offer of 0% for 12 month to payback IRA. IRA funds went to Roth, taxes already withheld. W4 deduction adjusted to account for tax prepayment.

Planning to sell old house in a few months.

So far it is working out. Socking away cash to pay down insane credit card transfer in case old house sale stretches longer than expected.

 

[Peter]

Is there a reason you wouldn't just get a mortgage (not just a bridge loan) on the new home? I would think you could qualify if you have the resources to buy new w/o selling the old. It would save you the cap gains, and rates are low now. You could pay it off/down when you sell the old home, if that's what you want.

-ERD50

It's an option. In fact before COVID struck we had a pre-approval letter from a major bank, but that expired several months ago. Now the bank won't renew the offer, hence looking at other possibilities. I suppose we could go through the process with another lender, but I'd really prefer to have lines of credit available so that we can immediately make a cash offer when a suitable place comes on the market.


I should add that around here, the market is really hot, and the advice we've been given is that 'no contingency' offers are the only ones that sellers will consider.

 

[Badger]

I sold and bought at the same time. Once I located the house I could afford/wanted I contacted the realtor who made the listing and made an offer. If she could sell the house I was living in then I would buy the house she was trying to sell (it was part of an estate but in bad repair). She could sell my house for any amount as long as the total cost of the house i was buying did not exceed $X. She jumped at the offer. Two days later she held an open house and sold it in 3 days. I signed the papers for the new house the same day. I was moving into the "new" house within a week.


Cheers!

 

[gauss]

Making a offer on a new house raises the question of where the money comes from.

[SIZE=-1]Suppose I sell stocks from my taxable account. Capital gains tax will of course be payable. The funds released would be applied to a cash offer on the new house. After the old house sells, I'd reinvest in taxable account stocks to get back to the original AA.

Assuming that, even without this transaction, those stocks would be sold eventually, I would essentially be paying capital gains tax in advance, but the long term result would be the same.

Am I missing something here? [/SIZE]

DMIL signed a purchase contract for a new home before selling her old one.

I advised her to get a Home Equity Loan (or maybe it was HELOC) on the old old home which happened to paid off in full.

The HELOC had lower fees and easier application than a traditional mortgage. I am not sure how this differs from a "bridge loan".

-gauss