Selling stocks to buy house

[Tykimeister]

Hello I had a couple questions I would like to seek input on. I am in the process of buying a house so I have two issues I don't fully understand. My goal is to either pay cash for my house now or possibly finance roughly 90,000 and plan on paying that off be years end. To pay all cash I would need to liquify some assets.

Question 1
Should I sell only stocks in the green, or should I include some in the red?

For example, I have 90,000 in SP 500 that would be 32,000 taxable earnings. (I did make 20,000 contribution to this fund that is less than 1 year (not entirely sure how its calculated short vs long term gains when they both are in the same account and type of fund).

Another example, I have 6,700 of another stock that is in the red -5,000

I plan on being in the 32% tax bracket by years end and I don't plan on selling any other stocks. I maxed out my 401k already this year and I still need to make a non-deductible IRA contribution to my traditional IRA. Any other investment purchases would be in the brokerage account. I know there may be advantages with selling the red stocks over only the green, that is what I want to figure out which is better to sell.

Question 2
Generally speaking, is selling stocks in my brokerage account a good idea instead of taking out a mortgage for only 90,000? I think my closing costs will be roughly $5,000 with financing, $2000 without. Along with paying interest for potentially 9 months or longer then paying off the principal as soon as I can.

My goal is to make the best financial decision and to also understand the tax implications for next year. I have an emergency fund.

Thank you and I would appreciate any insight that is offered!

 

[RetiredHappy]

When I can take a loss against a gain, I always do so. In other words, sell the one that is in the red when you sell positions that will incur gains. Long term capital gains are taxed at 15%, or higher depending on your total income, at federal tax level. Short term gains are taxed as earned income level, i.e. 32% in your case.

When we used to live in CA, I also paid CA income tax and they treat all gains as earned income level, so long or short term there is no difference.

Only you can decide whether to take a mortgage or not.

The other thing that you mentioned is to contribute to taxable account this year. If you anticipate having more "spare" money, you can get a loan against your taxable account. Then when you have the money, you just pay it back. The rates are not bad.

 

[Tykimeister]

When I can take a loss against a gain, I always do so. In other words, sell the one that is in the red when you sell positions that will incur gains. Long term capital gains are taxed at 15%, or higher depending on your total income, at federal tax level. Short term gains are taxed as earned income level, i.e. 32% in your case.

When we used to live in CA, I also paid CA income tax and they treat all gains as earned income level, so long or short term there is no difference.

Only you can decide whether to take a mortgage or not.

The other thing that you mentioned is to contribute to taxable account this year. If you anticipate having more "spare" money, you can get a loan against your taxable account. Then when you have the money, you just pay it back. The rates are not bad.

From what I understand, there is a max $3000 limit on capital losses for any given year? Should I avoid selling more than that limit on capital losses stock? Will vanguard let me know what the capital loss is on my 1099?

Also, if 20,000 of my SP 500 was invested less than 1 year ago, how do I calculate the short term vs long term capital gains if the account has long term gains already?

 

[38Chevy454]

$3000 is the max net loss you can deduct, any remainder you carryover to future year(s). But you can offset more than $3000 losses with more than $3000 gains. The $3000 is just the net loss maximum, not the gross loss. Gross loss is offset by gains, so in your case if I understand it right, you have $5000 in potential losses. So offset up to $5000 in gains and you have a net of zero liability for tax purposes. Then you can sell long term gains for any additional funds and those are taxed at the LTCG rate of 15%.

As to your question of mortgage or not, are you planing to make that $90K by income during the year? If so, then it just becomes a question of the interest on the mortgage until you pay it off, and your desire to have a fully paid for home.

 

[audreyh1]

The $3000 limit only applies to ordinary income like from wages or interest.

Capital losses are unrestricted when offset against capital gains. Very important to understand this.

For example if in one tax year you have $80,000 capital losses and $100,000 capital gains, you are only taxed on the net $20,000 of capital gains for that year.

 

[RetiredHappy]

You can take any amount of long term capital losses against the long term capital gains. If you have no long term gains to take against, then you can only take $3K losses against regular earned income.

 

[38Chevy454]

You can take any amount of long term capital losses against the long term capital gains. If you have no long term gains to take against, then you can only take $3K losses against regular / short-term capital gain income.

That's what I said, I think? Maybe it is isn't worded clear enough, but we are saying the same thing.

 

[audreyh1]

I think we all answered at the same time.

 

[Tykimeister]

So if I liquify assets to purchases the home and I end up having 30,000 in long term capital gains and 10,000 in capital losses, that just reduces my long term capital gains taxable amount to 20,000? And the 3,000 limit doesn't even apply because the loss isn't greater than the gains?

 

[RetiredHappy]

So if I liquify assets to purchases the home and I end up having 30,000 in long term capital gains and 10,000 in capital losses, that just reduces my long term capital gains taxable amount to 20,000? And the 3,000 limit doesn't even apply because the loss isn't greater than the gains?

Correct.

 

[Tykimeister]

Thank you everyone for the help.

If one fund has short term capital gains and long term capital gains within the same account, can you only liquify the long term portion and leave the short term amount? How do you go about calculating that and/or is it allowed?

 

[N02L84ER]

If the loss is a long term capital loss it offsets a long term gain. If the loss is a short term capital loss it offsets a short term gain if you have any, then any extra will offset a long term gain. I think.

 

[RetiredHappy]

Thank you everyone for the help.

If one fund has short term capital gains and long term capital gains within the same account, can you only liquify the long term portion and leave the short term amount? How do you go about calculating that and/or is it allowed?

When you sell, the system allows you to pick the lots to sell from. Closed positions are calculated automatically by all the large investment firms' systems. You need to play with whichever brokerage you have your investments with. I am very familiar with Fidelity and know exactly how to pick which lots to sell from. There is also a tap for closed positions, i.e. buy and sell prices and amounts.

 

[audreyh1]

Agreed - you might be able to pick the lots to sell and thus minimize your capital gains or maximize capital losses and also avoid short gains if you wish. But regardless the short losses or gains offset each other first otherwise offset the long capital gains/losses.

 

[Tykimeister]

If the loss is a long term capital loss it offsets a long term gain. If the loss is a short term capital loss it offsets a short term gain if you have any, then any extra will offset a long term gain. I think.

What if it is the long term capital loss and short term capital gain? But long term capital gain is greater than the long term capital gain but the short term capital gain is less than the long term capital loss?

SP500 shares have both short term capital gains and long term capital gains. 33,000 worth

Other stock has long term capital loss. 5,000 worth

 

[Tykimeister]

Agreed - you might be able to pick the lots to sell and thus minimize your capital gains or maximize capital losses and also avoid short gains if you wish. But regardless the short losses or gains offset each other first otherwise offset the long capital gains/losses.

Got it, thank you! I am going to call vanguard in the morning to confirm a few things before taking actions.

I appreciate everyone's help!

 

[TheWizard]

When time comes to sell an ETF or MF (I own no individual stocks), I always sell those lots with the highest basis, meaning lowest gain.
This often means those lots with losses,maybe bought three weeks ago.

I recommend you, the OP, do the same...

 

[audreyh1]

Highest basis?

 

[TheWizard]

Highest basis?

Yes, thanks.
Too much adult beverage...

 

[Sunset]

Thank you everyone for the help.

If one fund has short term capital gains and long term capital gains within the same account, can you only liquify the long term portion and leave the short term amount? How do you go about calculating that and/or is it allowed?

Just select specific lots to sell and you can pick the long term ones.

As a general rule, I set my global choice to specific lots for my brokerage account, so that when selling I get the choice.

Ask Vanguard how to set it for your account overall.