Heloc or Sell taxable ? Home Remodel 100K

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
confusedinvestor
Posts: 653
Joined: Thu Mar 15, 2012 11:04 am

Heloc or Sell taxable ? Home Remodel 100K

Post by confusedinvestor » Fri Mar 15, 2019 12:02 am

Hi Folks,
My wife and I cant decide if we should take heloc or sell some of our taxable portfolio to fund our upcoming home renovation 100K.

Note: https://www.bogleheads.org/wiki/Paying_ ... _investing

- Heloc 5% variable on 100k for 15 yrs or 5.875 fixed on 100k (heloc already approved for 200K)
- we have taxable brokerage around 300K - I was considering to sell 100k
- sell schwab intelligent portfolio of 50K - long-term gain of 5k
- sell schwab target date 2030 fun of 50k - long term gain of 5k

this will help reduce complexities of my taxable portfolio and move towards simplied 3Fund but with a tax hit of 10K


we have some liquidity concerns but we would still have some liquid (200k of taxable, 200k heloc approved, 100k roth

What would you do if you were in my boat?

Please help us with your thoughts.

oregonian
Posts: 11
Joined: Sun Jul 31, 2016 3:51 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by oregonian » Fri Mar 15, 2019 2:12 am

In our case, with major remodels (>$50K), we have used a strategy of

1) paying the early expenses from cash flow and ad hoc savings accumulated during the 'let's do the...' phase,
2) getting a HELOC and drawing from it during the peak billing period
3) Paying down the HELOC from cash flow and opportunistic asset sales as the project wraps and afterwards

The cost of the HELOC with our credit union is modest. Set up and closing fees were possibly more than the interest paid over the lifetime of the last HELOC (< 1 year).

As we have moved through the rebuilding of our house, and we've accumulated assets to sell, the length of time of the third phase has decreased.
On the last project the primary use of the HELOC was to manage cash flow over the project, not as a mortgage.

megabad
Posts: 2460
Joined: Fri Jun 01, 2018 4:00 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by megabad » Fri Mar 15, 2019 9:15 am

My preferred methods would be:

1) cashflow it (save short term)
2) sell taxable portfolio losses first, than gains (avoid CG tax)

If you choose to realize a bunch of taxable gains vs HELOC, really you would just be asking how long it will take you to cashflow the expense (payback the HELOC). If you can payback the HELOC in 2 years, this would be preferable. But if you can payback the HELOC in 2 years, you probably don't need the HELOC.

stan1
Posts: 7562
Joined: Mon Oct 08, 2007 4:35 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by stan1 » Fri Mar 15, 2019 9:26 am

confusedinvestor wrote:
Fri Mar 15, 2019 12:02 am

- we have taxable brokerage around 300K - I was considering to sell 100k
- sell schwab intelligent portfolio of 50K - long-term gain of 5k
- sell schwab target date 2030 fun of 50k - long term gain of 5k

this will help reduce complexities of my taxable portfolio and move towards simplied 3Fund but with a tax hit of 10K
Please clarify for us. Is the long term gain $10K or would you owe $10K of tax. Note that the federal long term capital gains tax rate is generally 15%, so if that's your situation you would owe $1500 in tax not $10K. Your state may also tax capital gains.

I would pay the $1500 and enjoy the remodel. I would see it as an opportunity to improve the tax efficiency of my taxable account by selling those funds.

My primary goal in life is not to avoid paying taxes.

Topic Author
confusedinvestor
Posts: 653
Joined: Thu Mar 15, 2012 11:04 am

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by confusedinvestor » Fri Mar 15, 2019 10:11 am

Thanks.

Yes, long term gain is 10K, not 10k tax due.

That is exactly I am thinking of opportunity cost to get out of those complex tax inefficient portfolios which will help me to simplify overall AA for long term.

Sadly, I don't have cash flow after 401K full contributions of my wife and myself including 401K after tax 55K contributions.

stan1 wrote:
Fri Mar 15, 2019 9:26 am
confusedinvestor wrote:
Fri Mar 15, 2019 12:02 am

- we have taxable brokerage around 300K - I was considering to sell 100k
- sell schwab intelligent portfolio of 50K - long-term gain of 5k
- sell schwab target date 2030 fun of 50k - long term gain of 5k

this will help reduce complexities of my taxable portfolio and move towards simplied 3Fund but with a tax hit of 10K
Please clarify for us. Is the long term gain $10K or would you owe $10K of tax. Note that the federal long term capital gains tax rate is generally 15%, so if that's your situation you would owe $1500 in tax not $10K. Your state may also tax capital gains.

I would pay the $1500 and enjoy the remodel. I would see it as an opportunity to improve the tax efficiency of my taxable account by selling those funds.

My primary goal in life is not to avoid paying taxes.

phxjcc
Posts: 174
Joined: Thu Aug 23, 2018 3:47 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by phxjcc » Fri Mar 15, 2019 12:02 pm

Don't you hate when people here answer questions with questions?

I sure do.

So, why are you not doing a cash out refi? :sharebeer

glennherwig
Posts: 20
Joined: Wed Oct 24, 2018 7:52 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by glennherwig » Fri Mar 15, 2019 1:42 pm

Schwab has a pledged asset line. Where you can borrow up to 75% of taxable. Obviously this has risks. But it would avoid the capital gains tax, heloc, and solve your cash need. Money can’t be deposited to a brokerage account only savings or checking

FrankLUSMC
Posts: 157
Joined: Tue Nov 28, 2017 1:43 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by FrankLUSMC » Fri Mar 15, 2019 2:20 pm

Just closed for a HELOC today.

Some specifics:
Home value 450K+, 1st Mtg. 154K @ 3% 15 year with 6 years left
Have 1.8 Mil in IRA (DW and mine)
Have spent down taxable account over last couple years with 2 new HVACs (2 years back to back) home built in 2000.

Chose HELOC instead of cash out for the following:
Have plans to renovate master bath, add onto existing deck and plan for future siding/roof replacement
Need cash flow without causing taxable events (withdrawing from IRA)
Heloc is 4.2% fixed for 1 year and variable after, get 10 year draw period and 20 years after draw to pay off.
Wife scheduled for retirement in Dec. 2019

I have a lot of gears in my machine and only the few above really matter.

Topic Author
confusedinvestor
Posts: 653
Joined: Thu Mar 15, 2012 11:04 am

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by confusedinvestor » Fri Mar 15, 2019 8:25 pm

Thanks. I am thinking to sell the bonds in my taxable and that schwab target date 2030 fund to pay this remodel - this will help not to take the variable interest rate risk with heloc but it impacts my liquidity


really not sure what to do - heloc vs sell-taxable
megabad wrote:
Fri Mar 15, 2019 9:15 am
My preferred methods would be:

1) cashflow it (save short term)
2) sell taxable portfolio losses first, than gains (avoid CG tax)

If you choose to realize a bunch of taxable gains vs HELOC, really you would just be asking how long it will take you to cashflow the expense (payback the HELOC). If you can payback the HELOC in 2 years, this would be preferable. But if you can payback the HELOC in 2 years, you probably don't need the HELOC.

MotoTrojan
Posts: 6484
Joined: Wed Feb 01, 2017 8:39 pm

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by MotoTrojan » Fri Mar 15, 2019 8:41 pm

5-6% after-tax return is huge. At that interest rate and with such low cap-gains I’d sell the taxable. You’d need to make 7%+ on the taxable holdings to make the heloc a break even and that’s no guarantee.

Topic Author
confusedinvestor
Posts: 653
Joined: Thu Mar 15, 2012 11:04 am

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by confusedinvestor » Fri Mar 15, 2019 9:02 pm

Thanks. No bond would pay 7%+ to break even 5-6% heloc ( negative bond)

With a 60:40, there is no guarantee to make 7%+ for next 15 yrs and taking much risk on 60% stock ...
and as I am in ca, I cant deduct heloc interest as i'm not itemizing anymore,
so i'd just sell my taxable ..

:sharebeer
MotoTrojan wrote:
Fri Mar 15, 2019 8:41 pm
5-6% after-tax return is huge. At that interest rate and with such low cap-gains I’d sell the taxable. You’d need to make 7%+ on the taxable holdings to make the heloc a break even and that’s no guarantee.

Topic Author
confusedinvestor
Posts: 653
Joined: Thu Mar 15, 2012 11:04 am

Re: Heloc or Sell taxable ? Home Remodel 100K

Post by confusedinvestor » Sat Mar 16, 2019 10:38 pm

thanks everyone,

Post Reply