Sell stocks now to buy house in 2 years?

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RenoJay
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Sell stocks now to buy house in 2 years?

Post by RenoJay »

I have a friend who wants to buy a house in about two years. It'll likely be a cash deal for the house, and most of the funds are currently in index funds at Vanguard in a taxable account which has fairly substantial unrealized long term capital gains. Should she:

1. Sell enough equities now to cover the whole house purchase and throw the money in a CD?

2. Sell enough equities now to cover half the house purchase?

3. Sell in dribs and drabs over the next two years?

4. Use some other strategy not mentioned?

Thanks!
retiredjg
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Re: Sell stocks now to buy house in 2 years?

Post by retiredjg »

I think we'd all agree she should not leave the money in stocks for the next 2 years. :happy I don't know if there is a best answer to this one, but I'm interested in hearing what others have to say.

Is she willing to risk not having all the money available if she doesn't sell it all now? If it were me, I can't imagine leaving any of the money there past the first week of January 2015. But I can imagine selling half now and half next January if there were some tax benefit to that. If the taxes would be the same, I'd sell it all now.
Quickfoot
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Re: Sell stocks now to buy house in 2 years?

Post by Quickfoot »

You mention it's in index funds but not asset allocation, is it all equities?

It depends on their capital gains and tax situation but they should sell as much as they can responsibly now. Perhaps 1/2 now and 1/2 next year if they need to spread the gains out. If their tax situation allows I'd sell enough to buy the whole house now and put it in either CDs or a short term bond fund.
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Meg77
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Re: Sell stocks now to buy house in 2 years?

Post by Meg77 »

I think it is difficult to make a recommendation without knowing more about her total financial situation (income/tax bracket, amount in cash currently, additional assets beyond these which are earmarked for a house, age). Those factors would likely change my advice. For instance, if this friend is younger - and particularly if she doesn't plan to stay in this new house forever - then I probably wouldn't recommend that she sell stocks to pay cash for the house to begin with. If these index funds represent all or most of her investments then that's another reason that financing a home with a mortgage may be a better option - or buying less house. I'm also curious as to why she is waiting precisely two years. Interest rates and home prices are likely to be higher by then, so if she is sure she wants to buy (and particularly if she insists on paying cash), then why wait?

But that wasn't your question. :oops:

If she is sure about her plans to use these stocks to buy a home in 2 years, then I would certainly sell a portion of the stocks in 2014, a portion in 2015, and a portion in 2016 in order to spread out the taxable gains. Maybe sell half of the funds this year, a quarter next year and the remaining quarter in early 2016. Her tax bracket and the amount of the gains matters here. If selling even that half this year will bump her into a high enough tax bracket to increase her capital gains tax rate, then I'd opt to hold a little longer than may be otherwise prudent in order to sell more next year instead.

If it were me I'd probably want to set up a defined selling plan to prevent myself from trying to time the market and to minimize the impact of taxes. Maybe sell $XX amount each month in an organized way so that it's all in cash by the time the purchase rolls around. No need to place the money in a CD though. You'll get paid almost nothing and there are online savings accounts paying more yield - without a penalty for withdrawing early.
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livesoft
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Re: Sell stocks now to buy house in 2 years?

Post by livesoft »

What other resources does she have? For example, if she has a "house fund" of index funds and separate funds for other things like retirement, then I would recommend she just have an overall asset allocation and see what happens. If that means her "house fund" is 100% equities, then I am OK with that.

Furthermore, if she is able to add to those funds over the next two years, then I would just keep it in 100% equities unless they drop in value about the same amount as she can add. Note that if they drop in value, tax-loss harvesting may be another way to get some extra money.

I like risk, so 100% equities for this money for me as long as it is part of an overall financial picture which it must be.
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bottlecap
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Re: Sell stocks now to buy house in 2 years?

Post by bottlecap »

Surely take what she wants to use to buy the home, whether it be the full amount or half or whatever, out of the stock market. She must assume that 50% to 60% of whatever she leaves in the market will not be available for the home purchase in two years. Whether that comes to pass may be a different story, but for anything she knows she will NEED in two years should be in a relatively risk free investment (and earning basically nothing in this environment).

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SGM
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Re: Sell stocks now to buy house in 2 years?

Post by SGM »

This is all market timing so there is no good answer. I would probably sell a good portion this year to guard against a shortfall. I would hope to minimize taxation by splitting the gains over two years at least. Also the price of the house could go up in the mean time which would be disheartening. There is a bit of a seasonal cycle in purchasing houses. Maybe fewer people are out looking for houses in the winter?

When I have paid cash for a house it was after a market run up and the house was purchased shortly after the stock sales. I may have had a bit of a cash cushion....not an emergency account, but a purchase account with the thought of buying something at some point. I don't like cash or emergency accounts to be very high, because I like all my money to be working for me all of the time, but sometimes I have broken my own rules.

If the stock market takes a precipitous fall then maybe a down payment should be made with the earlier stock sales and the balance paid with a mortgage. It is a crap shoot and you have to get lucky to realize the optimum stock sale date.
retiredjg
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Re: Sell stocks now to buy house in 2 years?

Post by retiredjg »

It seems to me that there are only two times when selling piece-meal could change the taxes on long term capital gains. One time would be when going from the 15% bracket (0% tax on long term capital gains) to the 25% bracket (15% tax on long term capital gains). The other would be when going over that number when capital gains rises from 15% to 20%. I don't remember the exact line that is to cross, but it way above most folks.

The in-between area is huge and LTCGs are all taxed at 15% in that huge space. So I'm not sure how selling at more than one time can save money. I wonder if I'm being too simplistic on this. Maybe phase-outs come into play or something like that.
swaption
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Re: Sell stocks now to buy house in 2 years?

Post by swaption »

RenoJay wrote:I have a friend who wants to buy a house in about two years. It'll likely be a cash deal for the house, and most of the funds are currently in index funds at Vanguard in a taxable account which has fairly substantial unrealized long term capital gains. Should she:

1. Sell enough equities now to cover the whole house purchase and throw the money in a CD?

2. Sell enough equities now to cover half the house purchase?

3. Sell in dribs and drabs over the next two years?

4. Use some other strategy not mentioned?

Thanks!
I'll put this differently, what are the reasons for not doing the first option?

When you say there are substantial long term capital gains, I think to myself that success breeds complacency. So in the context of my above question, the answers should be put up against the wisdom (or lack thereof) of investing in equities over a 2 year time horizon.
DSInvestor
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Re: Sell stocks now to buy house in 2 years?

Post by DSInvestor »

Is she reinvesting dividends in the taxable account? If she collected the dividends, that would reduce the need to sell shares in 2 years.
Maybe sell some now if she can qualify for 0% LTCG tax rate for 2014 and some more at 0% in 2015, then the final sale in 2016.
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Artsdoctor
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Re: Sell stocks now to buy house in 2 years?

Post by Artsdoctor »

Reno,

There can be no answer that would be helpful because you've given no significant details. Does she want to buy a house for over $1M or $100,000? What are "substantial" gains? Are we talking $500,000 in long-term capital gains, or half in short-term capital gains, or is "substantial" only $30,000?

The most important acknowledgement has to be that having money you're going to need in two years all wrapped up in the equity markets is inappropriate. If this is truly the case here, she needs to sell the money that she'll need as soon as is reasonable. If her short-term gains turn into long-term gains within a month, timing is important. But short of that she'll need to rethink her investment strategy because she doesn't understand the difference between saving and investing. Based on what you're describing, she should probably meet with financial advisor who will charge by the hour in order to at least grasp some fundamentals.
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