What to do with Home Sale profits?

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Topic Author
pepperz
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What to do with Home Sale profits?

Post by pepperz » Thu Apr 11, 2019 11:19 pm

We will soon be selling our primary residence of 10 years. I’d estimate we will walk away with around $100K profit after all costs.

1) Would that $100K be tax-free only if we rolled that amount into a new primary residence? Or is it tax free no matter what we do with it? (I have heard it both ways and am confused.) [Update: thank you for the validation. The answer is YES- tax free no matter what!]

2) Assuming it is tax-free regardless, should we put the $100K in taxable (VTSAX) or pay down our new mortgage and lessen our monthly payment by $500?

Background:

- We just bought a new home for $570K
- Financed $427K @ 4.75%. No PMI.
- Monthly payment on new home is ~$2,400 right now (would be ~$1,900 if we roll the $100K)
- Recasting the mortgage would involve only a $300 one-time fee

Additional details:

- I estimate our 2019 Tax Bracket will be 35%. No state income tax.
- We will likely take the Standard Deduction
- Current Investment Portfolio:
Tax Deferred IRA's / 401K / HSA: $87K (invested 90% stocks)
Roth IRA's: $65K (100% stocks)
Taxable: $120K (100% stocks)
Emergency: $50K with Ally Bank
What else would be prudent to know in order to make a wise decision here?
Last edited by pepperz on Mon Apr 15, 2019 1:21 pm, edited 4 times in total.

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ResearchMed
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Re: What to do with Home Sale profits?

Post by ResearchMed » Thu Apr 11, 2019 11:25 pm

pepperz wrote:
Thu Apr 11, 2019 11:19 pm
We will soon be selling our primary residence of 10 years. I’d estimate we will walk away with around $100K profit after all costs.

1) Would that $100K be tax-free only if we rolled that amount into a new primary residence? Or is it tax free no matter what we do with it? (I have heard it both ways and am confused.)

2) Assuming it is tax-free regardless, should we put the $100K in taxable (VTSAX) or pay down our new mortgage and lessen our monthly payment by $500?

Background:

- We just bought a new home for $570K
- Financed $427K @ 4.75%. No PMI.
- Monthly payment on new home is ~$2,400 right now (would be ~$1,900 if we roll the $100K)
- Mortgage co says we can recast for a $300 one time fee

What else would be prudent to know in order to make a wise decision here?
Have you lived in the house for all of those 10 years?
If so, then any profit up to 250k single/500k couple is indeed tax free. Period. You can do whatever you want with it.
(The 'rolling into another property' rules bit the dust ages ago.)

RM
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HereToLearn
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Re: What to do with Home Sale profits?

Post by HereToLearn » Thu Apr 11, 2019 11:40 pm

I believe that as long as you have lived in the house for two of the last five years, you are entitled to a $250K capital gains exemption if single, and $500K if married, so no tax implications.

Topic Author
pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Thu Apr 11, 2019 11:50 pm

Thanks guys. That is fantastic news.

And now onto the rather important decision: lower mortgage or invest?

DonIce
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Re: What to do with Home Sale profits?

Post by DonIce » Thu Apr 11, 2019 11:59 pm

What's your tax bracket? And are you itemizing or taking the standard deduction? The answer to these questions impacts what rate of return you'd need on your investments for them to be more worthwhile than the return you get by paying down the mortgage.

How big is your investment portfolio currently? If it's small/non-existent, that would increase the reason to invest it (diversify away from just your house as an asset).

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tennisplyr
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Re: What to do with Home Sale profits?

Post by tennisplyr » Fri Apr 12, 2019 6:46 am

I put mine into Vanguard Balanced Funf.
Those who move forward with a happy spirit will find that things always work out.

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HueyLD
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Re: What to do with Home Sale profits?

Post by HueyLD » Fri Apr 12, 2019 9:18 am

pepperz wrote:
Thu Apr 11, 2019 11:19 pm
We will soon be selling our primary residence of 10 years. I’d estimate we will walk away with around $100K profit after all costs.

1) Would that $100K be tax-free only if we rolled that amount into a new primary residence? Or is it tax free no matter what we do with it? (I have heard it both ways and am confused.) [Update: thank you for the validation. The answer is YES- tax free no matter what!]
It depends even though it appears that you never sold your primary residence before 5/7/1997 and postponed the profit.

JGoneRiding
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Re: What to do with Home Sale profits?

Post by JGoneRiding » Fri Apr 12, 2019 9:24 am

If you are already maxing retirement and on track for your anticipated retirement date than I would.pay down that mortgage at that rate. If retirement seems "light" I would invest for long term.

tomd37
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Re: What to do with Home Sale profits?

Post by tomd37 » Fri Apr 12, 2019 9:25 am

Pepperz - Although you have already received the correct replies, I want to comment on that "rollover" to a more expensive home you mentioned. That requirement went out back around 1995 or maybe before. I mention it only because other people may be thinking the same thing.
Tom D.

chevca
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Re: What to do with Home Sale profits?

Post by chevca » Fri Apr 12, 2019 9:33 am

pepperz wrote:
Thu Apr 11, 2019 11:19 pm
- Financed $427K @ 4.75%. No PMI.

What else would be prudent to know in order to make a wise decision here?
I haven't been checking myself lately, but it seems mortgage rates are a good bit lower than 4.75% nowadays. What about refinancing to a lower rate and putting more cash down to lower the monthly payment/balance? Win, win it would seem.

Topic Author
pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Fri Apr 12, 2019 10:35 pm

- I estimate our 2019 Tax Bracket will be 35%. No state income tax.

- We will likely take the Standard Deduction

Re: our Investment Portfolio, I'm not sure whether it is considered "small" or "adequate" for our age (I am 39 and my wife is 37) but here is the breakdown of our investment accounts:

Tax Deferred IRA's / 401K: $87K (invested 90% stocks)
Roth IRA's: $65K (100% stocks)
Taxable: $120K (100% stocks)
Emergency: $50K with Ally Bank

Thank you for the help!

DonIce wrote:
Thu Apr 11, 2019 11:59 pm
What's your tax bracket? And are you itemizing or taking the standard deduction? The answer to these questions impacts what rate of return you'd need on your investments for them to be more worthwhile than the return you get by paying down the mortgage.

How big is your investment portfolio currently? If it's small/non-existent, that would increase the reason to invest it (diversify away from just your house as an asset).
Last edited by pepperz on Sat Apr 13, 2019 10:19 am, edited 1 time in total.

Topic Author
pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Fri Apr 12, 2019 10:38 pm

JGoneRiding wrote:
Fri Apr 12, 2019 9:24 am
If you are already maxing retirement and on track for your anticipated retirement date than I would.pay down that mortgage at that rate. If retirement seems "light" I would invest for long term.
We are maxing retirement accounts but I really don't know if we are "on track". Income has drastically increased over the last 2 years and provided we stay the same or continue this way, we will definitely be in amazing shape. But I am in business for myself and not sure what the future holds for my industry.

Topic Author
pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Mon Apr 15, 2019 1:22 pm

Thanks for all the questions so far. I just updated my original post with all the details for easier reading.

shell921
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Re: What to do with Home Sale profits?

Post by shell921 » Mon Apr 15, 2019 2:00 pm

HereToLearn wrote:
Thu Apr 11, 2019 11:40 pm
I believe that as long as you have lived in the house for two of the last five years, you are entitled to a $250K capital gains exemption if single, and $500K if married, so no tax implications.
So....if I have lived in my home for 10 years and I sell it for $350K MORE than I paid for it I must pay capital gains on the $150K?

tomd37
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Re: What to do with Home Sale profits?

Post by tomd37 » Mon Apr 15, 2019 2:20 pm

shell921 - Possibly yes depending on circumstances; $250K exemption amount if single, $500K exemption amount if married, maybe $500K if selling within two years of date of death of spouse and all normal requirements met. Don't forget about items that might add to your basis in the home over the years you owned it and thus reducing any gain. There is a good IRS publication available online concerning the sale of your home (Pub 523).
Tom D.

CurlyDave
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Re: What to do with Home Sale profits?

Post by CurlyDave » Mon Apr 15, 2019 2:56 pm

pepperz wrote:
Thu Apr 11, 2019 11:50 pm
...And now onto the rather important decision: lower mortgage or invest?
I think it depends on your time horizon.

The mortgage is costing 4.75%, and that is a nominal, not real 4.75% since it is paid off in future dollars.

Since even the most pessimistic projections have nominal stock returns well above 4.75 %, I would invest the money. It also represents a deep back up emergency fund, which it is not if you pay down the mortgage.

OTOH, I am a risk-taker and some people are not. Or, if your time horizon is short and you want to avoid market risk, then pay down the mortgage.

HereToLearn
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Re: What to do with Home Sale profits?

Post by HereToLearn » Mon Apr 15, 2019 3:38 pm

shell921 wrote:
Mon Apr 15, 2019 2:00 pm
HereToLearn wrote:
Thu Apr 11, 2019 11:40 pm
I believe that as long as you have lived in the house for two of the last five years, you are entitled to a $250K capital gains exemption if single, and $500K if married, so no tax implications.
So....if I have lived in my home for 10 years and I sell it for $350K MORE than I paid for it I must pay capital gains on the $150K?
There are other costs that can be added to your basis: capital improvements plus costs associated with the sale of the home (RE broker commission, legal fees, transfer taxes, etc). You will pay capital gains tax on any amount more than $250K above the adjusted basis, so in your situation where you sell for $350K more than you paid for it, you would pay taxes on $100K. (Realistically less because you probably incurred expenses relating to sale of the property.)

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pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Mon Apr 15, 2019 4:47 pm

Your "future dollars" reference is a good point I hadn't thought about.
It also represents a deep back up emergency fund, which it is not if you pay down the mortgage.
Are you saying even if the amount is completely invested in stocks, that it still constitutes as a "back up emergency fund"? I would assume so but just want to make sure I understand you completely.
CurlyDave wrote:
Mon Apr 15, 2019 2:56 pm
pepperz wrote:
Thu Apr 11, 2019 11:50 pm
...And now onto the rather important decision: lower mortgage or invest?
I think it depends on your time horizon.

The mortgage is costing 4.75%, and that is a nominal, not real 4.75% since it is paid off in future dollars.

Since even the most pessimistic projections have nominal stock returns well above 4.75 %, I would invest the money. It also represents a deep back up emergency fund, which it is not if you pay down the mortgage.

OTOH, I am a risk-taker and some people are not. Or, if your time horizon is short and you want to avoid market risk, then pay down the mortgage.

CurlyDave
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Re: What to do with Home Sale profits?

Post by CurlyDave » Tue Apr 16, 2019 1:02 am

pepperz wrote:
Mon Apr 15, 2019 4:47 pm

...Are you saying even if the amount is completely invested in stocks, that it still constitutes as a "back up emergency fund"? I would assume so but just want to make sure I understand you completely.
Even 100% invested in stocks it is a back up emergency fund.

For instance, if I were in some kind of accident and could not work for a year or more, I would tap my regular EF first, but would be strongly considering selling stocks in taxable accounts next. If I could foresee being out of work for a year or more, I would start taking money out of the taxable stock account slowly. What I would probably do is put a trailing stop on the ETFs I hold, so that I could both take advantage of any short term price increases but also put a floor under any downturns.

I view my entire portfolio as kind of a tiered emergency fund. Tier 1, is cash, which is somewhat painful to let go of, but not terrible. Tier 2 is taxable stock holdings -- more painful than tier 1, but still available. Tier 3 is tax advantaged money -- very painful to withdraw. Penalties and not replaceable.

jyoung
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Re: What to do with Home Sale profits?

Post by jyoung » Tue Apr 16, 2019 2:18 am

You've gotten a lot of good replies, another thing to consider might be to use the 100k and refi into a 15yr loan instead. Payment won't change too much, but you'll pay far less interest over the life of the loan and be free of the debt much sooner. Just another option to think about.

Topic Author
pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Tue Apr 16, 2019 5:24 am

Every time I consider this, I am reminded that if you keep a 30-year mortgage and make an extra principle payment each month, you will have the loan paid of in exactly 15 years.

Same upside as a 15-year mortgage but in the event of a (hopefully temporary) life set-back you can always step back to the 30-year payments.
jyoung wrote:
Tue Apr 16, 2019 2:18 am
You've gotten a lot of good replies, another thing to consider might be to use the 100k and refi into a 15yr loan instead. Payment won't change too much, but you'll pay far less interest over the life of the loan and be free of the debt much sooner. Just another option to think about.

jyoung
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Re: What to do with Home Sale profits?

Post by jyoung » Tue Apr 16, 2019 5:53 am

[
pepperz wrote:
Tue Apr 16, 2019 5:24 am
Every time I consider this, I am reminded that if you keep a 30-year mortgage and make an extra principle payment each month, you will have the loan paid of in exactly 15 years.

Same upside as a 15-year mortgage but in the event of a (hopefully temporary) life set-back you can always step back to the 30-year payments.
That's a valid point. I had a similar situation with a lot of equity when I moved from the city to the suburbs a few years ago. I opted for the 15 because of simplicity and behavioral issues. However my payment was low enough either way I wasn't really concerned about it.

The cool thing was once my budget adjusted to the new payment I found myself making additional payments even to the 15yr term. I'm always amazed how flexible my budget really is... The opposite of lifestyle creep in this example. So that's what I'd do if my savings and retirement plan was on track, but I'm also hard wired to hate debt of all kinds I think. In your situation it sounds like one of those "good problems." I don't think there is a compelling right answer, just the one for you very personally.

ltlku
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Re: What to do with Home Sale profits?

Post by ltlku » Tue Apr 16, 2019 6:08 am

pepperz wrote:
Tue Apr 16, 2019 5:24 am
Every time I consider this, I am reminded that if you keep a 30-year mortgage and make an extra principle payment each month, you will have the loan paid of in exactly 15 years.
This is not correct. The amortization term of a 30 year loan when making double the monthly payment depends on the interest rate. The regular monthly payment is split between principal and interest. The additional monthly payment will be entirely principal.

For a 4.75% mortgage, making double the 30 year payment results in a payoff in 10 years.

ltlku
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Re: What to do with Home Sale profits?

Post by ltlku » Tue Apr 16, 2019 6:19 am

Many of these replies ignore taxes. Since you're taking the standard deduction, your mortgage rate is 4.75% after taxes.

Paying down your mortgage is a risk free investment. The closest comparable bond would be a US Treasury bond. Given your tax bracket of 35%, you are likely paying the NIIT of 3.8% as well. The duration on your mortgage is about 10 years. Treasuries of this duration are yielding around 2.6%. After tax, this is 1.59%, which is much less than prepaying your mortgage.

Put another way, you need the 10 year Treasury to yield (4.75 / ( 1 - 0.35 - 0.0388)) or 7.76% for you to invest in bonds and win vs prepaying your mortgage. I don't know why anyone would buy bonds in this situation in lieu of prepaying.

chevca
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Re: What to do with Home Sale profits?

Post by chevca » Tue Apr 16, 2019 6:25 am

ltlku wrote:
Tue Apr 16, 2019 6:08 am
pepperz wrote:
Tue Apr 16, 2019 5:24 am
Every time I consider this, I am reminded that if you keep a 30-year mortgage and make an extra principle payment each month, you will have the loan paid of in exactly 15 years.
This is not correct. The amortization term of a 30 year loan when making double the monthly payment depends on the interest rate. The regular monthly payment is split between principal and interest. The additional monthly payment will be entirely principal.

For a 4.75% mortgage, making double the 30 year payment results in a payoff in 10 years.
They didn't mean an actual extra full payment. They meant they would match the principal payment each month. So, if the monthly payment was $1000 with $300 to principal and $700 to interest, they would send an additional $300. And so on, as the amounts changed.

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pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Tue Apr 16, 2019 6:38 am

Thanks for the numbers comparison here. Just to be clear- I was never considering investing in bonds. Did someone else mention that here and I missed it?

The full amount would either be 100% invested in stocks or applied to the mortgage.
ltlku wrote:
Tue Apr 16, 2019 6:19 am
Many of these replies ignore taxes. Since you're taking the standard deduction, your mortgage rate is 4.75% after taxes.

Paying down your mortgage is a risk free investment. The closest comparable bond would be a US Treasury bond. Given your tax bracket of 35%, you are likely paying the NIIT of 3.8% as well. The duration on your mortgage is about 10 years. Treasuries of this duration are yielding around 2.6%. After tax, this is 1.59%, which is much less than prepaying your mortgage.

Put another way, you need the 10 year Treasury to yield (4.75 / ( 1 - 0.35 - 0.0388)) or 7.76% for you to invest in bonds and win vs prepaying your mortgage. I don't know why anyone would buy bonds in this situation in lieu of prepaying.

ltlku
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Re: What to do with Home Sale profits?

Post by ltlku » Tue Apr 16, 2019 7:09 am

pepperz wrote:
Tue Apr 16, 2019 6:38 am
Thanks for the numbers comparison here. Just to be clear- I was never considering investing in bonds. Did someone else mention that here and I missed it?

The full amount would either be 100% invested in stocks or applied to the mortgage.
Ok, that sounds more reasonable. I thought someone mentioned a balanced fund.

In that case, you need to beat 4.75 after taxes in stocks. Be sure to take into account dividend and capital gains taxes, NIIT, and state income taxes. This can add up to 35% for some people if you need to sell during working years. In other words, you'd need a 7% return on stocks to break even in that case as well.

rich126
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Re: What to do with Home Sale profits?

Post by rich126 » Tue Apr 16, 2019 7:12 am

I think I might take some of that and bump up the emergency funds. You don't mention (or I missed it) anything about the security of your employment.

The one thought I always carry with me is that someone once told me "People are always willing to loan you money when you don't need it, but when you do need it, you can't get it". So because of that I tend to be careful how much I put down on homes, cars, etc. I have a 2.7% car loan even though I can pay it off.

Even at 4.75% I'd lean towards not putting it all into the loan.

And I wouldn't say "Paying down your mortgage is a risk free investment" since once it is in the house, there are costs (in money and time) to get it back out in the event you need it.

Topic Author
pepperz
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Re: What to do with Home Sale profits?

Post by pepperz » Tue Apr 16, 2019 10:03 am

I am self employed and the past few years have been great but things could change easily. Currently I have a $50K 'emergency fund' with Ally Bank which would cover expenses very comfortably for 6 months. We could probably get 12 months coverage pretty easily if we needed to cut back on optional lifestyle stuff.

Cash on hand certainly provides peace of mind but I wonder if 12 months emergency is enough for us. Keeping in mind anything we have in taxable could be sold if necessary.
rich126 wrote:
Tue Apr 16, 2019 7:12 am
I think I might take some of that and bump up the emergency funds. You don't mention (or I missed it) anything about the security of your employment.

The one thought I always carry with me is that someone once told me "People are always willing to loan you money when you don't need it, but when you do need it, you can't get it". So because of that I tend to be careful how much I put down on homes, cars, etc. I have a 2.7% car loan even though I can pay it off.

Even at 4.75% I'd lean towards not putting it all into the loan.

And I wouldn't say "Paying down your mortgage is a risk free investment" since once it is in the house, there are costs (in money and time) to get it back out in the event you need it.

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