Plan to liquidate taxable holdings

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Topic Author
jlg
Posts: 71
Joined: Fri Apr 22, 2011 7:45 am

Plan to liquidate taxable holdings

Post by jlg »

Hi Folks,

2013 is coming to a close and it is never to early to start building a plan for 2014. Next year, we hope to buy a house. Or, at the very least, at the end of next year our time horizon to buying a house will be far shorter then it is today. (There is a good chance we will buy a house in 2014. We will almost definitely buy a house in 2015.) To buy this house, we need to bring some cash to closing. How much? No idea, since we don't know which house we are buying and we also don't know exactly how much it will cost AND how much cash we will need to bring to closing (cash to closing a function of how much is left on our current mortgage, how much we sell our current home for, the size of the new mortgage and how much the new home costs.) The number is unlikely to be zero.

We have longterm savings (which were built up for this very purpose) in our taxable Vanguard account - these are almost entirely equity mutual funds. By this fall, all gains (except for any dividend reinvestment) will be long term gains. We are currently in the 33% tax bracket. Selling EVERYTHING in our taxable account in the same year could push us into the 35% bracket, but not higher. Something like 30% of the funds in this taxable account are the result of gains.

I want to build a plan that sells investments from taxable and turns the proceeds into a principal payment against our current mortgage. What tips do folks have liquidating taxable holdings over the course of many months or multiple (2) tax years? What should I consider in building my plan to limit tax liability and reduce risk (basically, the closer we get the buying the home, the more we want these funds to be turned into cash or be used to just down our current mortgage - since the proceeds are just going to be turned around and used to buy the new house.)? Rebalancing due to equity reduction will also need to be part of this plan.

Thanks!
stan1
Posts: 14246
Joined: Mon Oct 08, 2007 4:35 pm

Re: Plan to liquidate taxable holdings

Post by stan1 »

1. Stop dividend reinvestment, so that you don't end up with more short term gains.
2. Capital gains are taxed at the capital gains tax rate -- not ordinary income tax rate. Capital gains alone will not push you into a higher tax bracket. Run scenarios in Turbo Tax.
3. I would not pay down your current mortgage at this time. Put the proceeds from the mutual fund sales into an FDIC insured savings account. You may want the liquidity to be able to put a down payment on the new house with an offer that is non-contingent upon the sale of your current house. Moving into the new house before you put the old house on the market is quite the luxury, if you can swing it, especially if you have kids/pets that make keeping a house in showing-ready condition a real challenge.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
Topic Author
jlg
Posts: 71
Joined: Fri Apr 22, 2011 7:45 am

Re: Plan to liquidate taxable holdings

Post by jlg »

stan1 wrote:1. Stop dividend reinvestment, so that you don't end up with more short term gains.
2. Capital gains are taxed at the capital gains tax rate -- not ordinary income tax rate. Capital gains alone will not push you into a higher tax bracket. Run scenarios in Turbo Tax.
3. I would not pay down your current mortgage at this time. Put the proceeds from the mutual fund sales into an FDIC insured savings account. You may want the liquidity to be able to put a down payment on the new house with an offer that is non-contingent upon the sale of your current house. Moving into the new house before you put the old house on the market is quite the luxury, if you can swing it, especially if you have kids/pets that make keeping a house in showing-ready condition a real challenge.
Stan1, that's good advice. A few questions ...

1) I'm not sure I understand how Capital Gains alone won't push me into a higher tax bracket? I understand that I would need to jump two brackets for the long-term capital gains rate to increase (like above $450k, which would be a big jump.) However, if I have $60k in capital gains and have income (less capital gains) of, say, $350k, wouldn't the extra $60k of income bump me into the 35% bracket? I guess your point is that it doesn't matter, since the tax treatment is different on those final $60k dollars.

2) Your advice about downpayment is helpful. Now, how exactly would this work? Lets say we are buying a place for $600k, with a mortgage of $300k. 20% down would be $120k. That leaves (in this example) $180k. Are you saying to save $300k for downpayment or that one would get a bridge loan or something until the new house is sold?
stan1
Posts: 14246
Joined: Mon Oct 08, 2007 4:35 pm

Re: Plan to liquidate taxable holdings

Post by stan1 »

jlg wrote: 1) I'm not sure I understand how Capital Gains alone won't push me into a higher tax bracket? I understand that I would need to jump two brackets for the long-term capital gains rate to increase (like above $450k, which would be a big jump.) However, if I have $60k in capital gains and have income (less capital gains) of, say, $350k, wouldn't the extra $60k of income bump me into the 35% bracket? I guess your point is that it doesn't matter, since the tax treatment is different on those final $60k dollars.

2) Your advice about downpayment is helpful. Now, how exactly would this work? Lets say we are buying a place for $600k, with a mortgage of $300k. 20% down would be $120k. That leaves (in this example) $180k. Are you saying to save $300k for downpayment or that one would get a bridge loan or something until the new house is sold?
1) Yes, the tax treatment is different on the $60K. Capital gains are taxed at the capital gains rate. However, you really need to use TurboTax to look at your specific situation especially as you get into higher tax brackets and have to potentially deal with AMT, state taxes, medicare taxes, etc.

2) Using your numbers, you would put at least $120K (20% or more) down on a new $600K house and get a mortgage for the remainder. You would move into the new house and then sell your old house. After escrow closes on the old house you would pay down the mortgage on the new house (or restore money into your investment accounts if you prefer to carry a larger mortgage). Of course you would have to qualify to have both loans at the same time to do this. You would tell the potential lender that you are going to sell the first house after you move out or rent it. This CAN be done by people with high incomes, you'd have to figure out whether it could be done in your specific situation by talking to lenders. Good friends are in the process of doing it right now. They have a 12 and 10 year old sons and a hectic life and absolutely do not want to deal with showing the house while the kids are living there. This avoids the need to move into a rental between houses, or make the purchase of the new house contingent upon the sale of the old house. If you don't have enough for the 20% down payment without selling the first house this may not be an option.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
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