Building A New Home In Retirement

[RetiredAt49]

My spouse and I just purchased (with cash) a lot on some acreage. We are both retired and in our early 50's. On paper, we show very little reportable taxable income (dividends/interest from taxable brokerage account + rental properties). Our other income is not taxed nor reported (it's a business buyout)

While we easily have enough financial assets to cover the cost of building our home, it's not the greatest idea from a tax perspective (because I would need to liquidate stocks from our taxable brokerage account and/or sell some real estate and incur capital gains). Our primary home (which is paid for) will cover about 70% of the cost of the new home so I don't want to sell stocks or rental properties because as soon as our new constructed home is complete we plan to sell our current primary home.

We've looked at getting a construction loan but "on paper" we don't show enough income. We could take out a HELOC on our current primary home but again it would only cover about 70% of the cost of our new build. The only viable option we can think of is to liquidate stocks/real estate and take a major tax hit this year (while also losing our ACA subsidy).

Have any of you been in this situation and is there another alternatively we haven't considered?

 

[street]

There are some smart people that should give some options. I'm no help but I would suggest not to cash in and take a tax hit and worse losing ACA and paying a premium for HI.

Good luck the wizards will chime in to help.

 

[RetiredHappy]

I am bias against rentals but I would sell a rental or two, or combine a HELOC on your primary home and sell a rental. I used to own 4 homes, 2 multi-million dollar homes overseas and rental here, and I have sold all three. Retirement includes simplifying my finances as well. Selling a rental home or two will only affect your ACA subsidy for one year. There are worse problems to have. I pay full freight for private individual off-exchange insurance because we have too much income. Not having ACA subsidy is not the end of the world.

 

[pacergal]

HELOC on primary home and sell one rental for rest of cash?
Run some scenarios through a tax program to see the impact on your finances.

 

[Ronstar]

I'm thinking about a new home also. Either build on a lot or buy a new home that is under construction and almost complete. I don't plan on doing any of the construction on the new house myself. Like OP, I think our current place is worth approx 70% of the new place.

One scenario I've thought about is selling our current house, and renting an RV for a year and travel the US while the new house gets built. So we would have at least 70% of the new house purchase price liquid from our current house sale by the tie the new house is done.

Like OP, I need to figure how to come up with 30%. I'll get nailed on taxes if I take the $ from our taxable account, and I'll get nailed on taxes if I take it out of my IRA.

I haven't looked into this yet, but hopefully DW's pension and our combined SS earnings would substantiate enough income to qualify for a mortgage for the 30%.

If I was OP, I'd sell rental property to generate the needed cash.

 

[ncbill]

My spouse and I just purchased (with cash) a lot on some acreage. We are both retired and in our early 50's. On paper, we show very little reportable taxable income (dividends/interest from taxable brokerage account + rental properties). Our other income is not taxed nor reported (it's a business buyout)

While we easily have enough financial assets to cover the cost of building our home, it's not the greatest idea from a tax perspective (because I would need to liquidate stocks from our taxable brokerage account and/or sell some real estate and incur capital gains). Our primary home (which is paid for) will cover about 70% of the cost of the new home so I don't want to sell stocks or rental properties because as soon as our new constructed home is complete we plan to sell our current primary home.

We've looked at getting a construction loan but "on paper" we don't show enough income. We could take out a HELOC on our current primary home but again it would only cover about 70% of the cost of our new build. The only viable option we can think of is to liquidate stocks/real estate and take a major tax hit this year (while also losing our ACA subsidy).

Have any of you been in this situation and is there another alternatively we haven't considered?

If you have a sufficiently large taxable portfolio borrow against it via a line of credit.

I just set one up at my brokerage...they contract it out to an external bank.

Which is probably why rates are lower than for a margin loan through the brokerage itself.

Only real restriction is that it can't be used to buy additional securities.

 

[momoney]

My spouse and I just purchased (with cash) a lot on some acreage. We are both retired and in our early 50's. On paper, we show very little reportable taxable income (dividends/interest from taxable brokerage account + rental properties). Our other income is not taxed nor reported (it's a business buyout)

While we easily have enough financial assets to cover the cost of building our home, it's not the greatest idea from a tax perspective (because I would need to liquidate stocks from our taxable brokerage account and/or sell some real estate and incur capital gains). Our primary home (which is paid for) will cover about 70% of the cost of the new home so I don't want to sell stocks or rental properties because as soon as our new constructed home is complete we plan to sell our current primary home.

We've looked at getting a construction loan but "on paper" we don't show enough income. We could take out a HELOC on our current primary home but again it would only cover about 70% of the cost of our new build. The only viable option we can think of is to liquidate stocks/real estate and take a major tax hit this year (while also losing our ACA subsidy).

Have any of you been in this situation and is there another alternatively we haven't considered?

I think someone else on here said they found a buyer that would rent their home back to them.

 

[finnski1]

I think you can get a loan based on your "pledged" assets. Others more knowledgeable will let you know. You would then not have to liquidate any stocks nor sell your present home first.

 

[RetiredAt49]

If you have a sufficiently large taxable portfolio borrow against it via a line of credit.

I just set one up at my brokerage...they contract it out to an external bank.

Which is probably why rates are lower than for a margin loan through the brokerage itself.

Only real restriction is that it can't be used to buy additional securities.

Which brokerage did you use (to take out a line of credit)? I'm familiar with taking out a margin loan (using the equities) but I've never heard of using a line of credit.

 

[ncbill]

Which brokerage did you use (to take out a line of credit)? I'm familiar with taking out a margin loan (using the equities) but I've never heard of using a line of credit.

Fidelity - Securities Backed Line of Credit

 

[Sunset]

Take out loans against primary residence and the rentals. Of course the problem with this is the normal high interest rates of mortgages.

 

[Looking4Ward]

I paid cash last year for one new home and put 50% down on another. I sold half of what I needed from my after tax brokerage account in December 2022 and the other half in January 2023 (picking which lots of shares to sell to keep cap gains under control) thereby splitting it between two tax years. I managed to do this without incurring any additional taxes and stayed under the 400% FPL cap.

 

[marinauser]

Fidelity has a mortgage referral program that may help here. Otherwise, I would talk to Schwab and consider a move to them if they can make a mortgage available through Schwab Bank. Schwab knows I am not working but i still get occasional inquiries should I need a mortgage through their Schwab Bank. If that might work, you would need to transfer some or all of your financial assets there I expect..

 

[copyright1997reloaded]

If Schwab: Pledged Asset Line

 

[SnowBound]

RetiredAt49: What did you find as a workable solution? DW & I are planning on building on a lot in two years (that we purchased 4 years ago, and got paid off lot year). Thanks

 

[HI Bill]

..."on paper" we don't show enough income....

Have you set up monthly deposits to a checking account from retirement account(s)? For annual income, the banks don't require 'earned income', but most do count regular deposits.

 

[RetiredAt49]

RetiredAt49: What did you find as a workable solution? DW & I are planning on building on a lot in two years (that we purchased 4 years ago, and got paid off lot year). Thanks

I contacted Fidelity and using my taxable brokerage account I was able to get an SBLOC (securities based line of credit). They use 3rd party banks to handle the SBLOC (I'm using US Bank) but similar to a HELOC on your home, I just did a similar thing but using my taxable brokerage account.

 

[G-Man]

I contacted Fidelity and using my taxable brokerage account I was able to get an SBLOC (securities based line of credit). They use 3rd party banks to handle the SBLOC (I'm using US Bank) but similar to a HELOC on your home, I just did a similar thing but using my taxable brokerage account.

Is the rate aligned to the prime rate?

 

[RetiredAt49]

Is the rate aligned to the prime rate?

It's aligned to what I believe they called the overnight rate for short term borrowing... don't recall the exact name of it. But we didn't have to pay anything (e.g. closing costs), origination fees, etc. Just have to pay interest monthly.

 

[kgtest]

Don't let the tax tail, wag the dog. It sounds like this is a legacy buy. I totally understand wanting to minimize taxes. Sometimes the decision isn't a financial one, depending on how you view life.

 

[Route246]

Don't let the tax tail, wag the dog. It sounds like this is a legacy buy. I totally understand wanting to minimize taxes. Sometimes the decision isn't a financial one, depending on how you view life.

I'm in a situation where I need to raise a chunk of cash (3-4M) to make a home purchase. It is complicated here in CA because of multiple tax considerations (fed, state, property). We have the equities assets with LTCG tax hit (nice problem to have, no complaints) but the marginal rate is 38% so it will get expensive for two years while we remodel and touch up the new place before we sell our existing home. Two years is a magic number because of something called Prop 19 which allows us to transfer our favorable tax treatment on the first 2M of our step-up (about 15K/year in property tax savings). The bulk of moving from 2M to 4-5M home is covered by sale of 2M home plus funds from inheritance a few years ago and equities sales to make up the difference and the bridge amount until the home is sold. We are not starting from scratch, we acquired equity and inherited 1/2 of parents' equity so this is a step-up more than anything else.

BTW, 5M doesn't buy much of a home here compared to other areas of the country. This is not some palatial place, just a 4BR ranch style home on 1/4 acre in a premium area. If you find this hard to believe just search Zillow for towns "los altos" "los altos hills" "palo alto" "saratoga" "atherton" "hillsborough" and look for 4BR on 1/4 acre lot. I contend these cities comprise an area that is the most expensive in the world including Tokyo, London, NYC, Chicago and Paris. Nothing else is even close. Comparable homes in Beverly Hills and Bel Air seem positively bargains compared to here.

Anyway, my CPA told me to not let the tax tail wag the dog, exactly as you stated. He said take the tax hit and enjoy our new home.

 

[ncbill]

I'm in a situation where I need to raise a chunk of cash (3-4M) to make a home purchase. It is complicated here in CA because of multiple tax considerations (fed, state, property). We have the equities assets with LTCG tax hit (nice problem to have, no complaints) but the marginal rate is 38% so it will get expensive for two years while we remodel and touch up the new place before we sell our existing home. Two years is a magic number because of something called Prop 19 which allows us to transfer our favorable tax treatment on the first 2M of our step-up (about 15K/year in property tax savings). The bulk of moving from 2M to 4-5M home is covered by sale of 2M home plus funds from inheritance a few years ago and equities sales to make up the difference and the bridge amount until the home is sold. We are not starting from scratch, we acquired equity and inherited 1/2 of parents' equity so this is a step-up more than anything else.

BTW, 5M doesn't buy much of a home here compared to other areas of the country. This is not some palatial place, just a 4BR ranch style home on 1/4 acre in a premium area. If you find this hard to believe just search Zillow for towns "los altos" "los altos hills" "palo alto" "saratoga" "atherton" "hillsborough" and look for 4BR on 1/4 acre lot. I contend these cities comprise an area that is the most expensive in the world including Tokyo, London, NYC, Chicago and Paris. Nothing else is even close. Comparable homes in Beverly Hills and Bel Air seem positively bargains compared to here.

Anyway, my CPA told me to not let the tax tail wag the dog, exactly as you stated. He said take the tax hit and enjoy our new home.

Why wouldn't you just borrow against your taxable portfolio via a pledged asset line as the OP did?

A $3+ million credit line would cost a little more than 7% given current rates, at Fidelity.

No other cost to setup or to use, and the credit line I requested was approved in just a few days.

 

[copyright1997reloaded]

I'm in a situation where I need to raise a chunk of cash (3-4M) to make a home purchase. It is complicated here in CA because of multiple tax considerations (fed, state, property). We have the equities assets with LTCG tax hit (nice problem to have, no complaints) but the marginal rate is 38% so it will get expensive for two years while we remodel and touch up the new place before we sell our existing home. Two years is a magic number because of something called Prop 19 which allows us to transfer our favorable tax treatment on the first 2M of our step-up (about 15K/year in property tax savings). The bulk of moving from 2M to 4-5M home is covered by sale of 2M home plus funds from inheritance a few years ago and equities sales to make up the difference and the bridge amount until the home is sold. We are not starting from scratch, we acquired equity and inherited 1/2 of parents' equity so this is a step-up more than anything else.

BTW, 5M doesn't buy much of a home here compared to other areas of the country. This is not some palatial place, just a 4BR ranch style home on 1/4 acre in a premium area. If you find this hard to believe just search Zillow for towns "los altos" "los altos hills" "palo alto" "saratoga" "atherton" "hillsborough" and look for 4BR on 1/4 acre lot. I contend these cities comprise an area that is the most expensive in the world including Tokyo, London, NYC, Chicago and Paris. Nothing else is even close. Comparable homes in Beverly Hills and Bel Air seem positively bargains compared to here.

Anyway, my CPA told me to not let the tax tail wag the dog, exactly as you stated. He said take the tax hit and enjoy our new home.

I have no comment on your strategy...just remarking that I turned down a job in the area in 1987, and was looking at houses similar to what you describe...and I remember them in the 200-250K arena. Wow.

 

[Route246]

Why wouldn't you just borrow against your taxable portfolio via a pledged asset line as the OP did?

A $3+ million credit line would cost a little more than 7% given current rates, at Fidelity.

No other cost to setup or to use, and the credit line I requested was approved in just a few days.

Pledged asset line is not deductible and cannot be used to offset bond interest? Let's say I borrow 500K and pay 35K interest. Can I offset against other dividends and interest in my brokerage account and use the 500K to pay for the house? It sounds like pledge asset line funds have to be used directly for investments. Not sure how they can tell but if I have 500K in treasuries would it be considered OK to offset the interest paid for the asset line with interest from 500K in treasuries? In other words, how would they know as long as I have brokerage assets well in excess of the 500K?

Colleague told me just sign up for a 500K mortgage, put 90% down and deduct up to 750K mortgage loan interest and then pay off the mortgage once we sell the old house in 18 months.

 

[RetiredHappy]

Margin loan and pledge asset line of credit is different. Margin loan can be used directly to buy other positions in the brokerage. You cannot deduct interests paid on borrowing from pledge asset line. The rule of thumb is that you can safely borrow one-third of your positions in your taxable brokerage accounts. At most you can be approved for up to half but beware of "margin calls" if the account value drops.