Strategic Tax Planning – Selling Stock to Buy a Home – LNK Tax Group
Buying a home with stock still requires that you pay capital gains tax. Paying taxes on stock gains is unavoidable whether or not you plan to use your gains as a down payment on a house. The tax rate on long-term capital gains, the stocks you held onto for more than one year, is lower than short-term capital gains. If you’re a first-time home buyer, you may be able to take advantage of government programs to help with a down payment.
Capital Gains Tax
The tax rate you pay on capital gains on a stock sale depends on how long you owned the shares. If you held onto the stock for greater than one year, you qualify for a lower capital gains tax rate of 15 percent. However, if you sold the shares within one year or less, the IRS taxes you at your ordinary income tax rate, which may be as high as 35 percent.
Selling Stocks to Buy a House
If you realize a gain on your stock holdings, you still have to pay a capital gains tax even if you immediately intend to put those gains to use by purchasing a house. The IRS views these events as mutually exclusive. You get a tax break only if you sell your home and use the proceeds to buy another home within two years of the sale. In such a case, you avoid capital gains tax unless your gain exceeded the maximum allowed for your filing status.
Borrowing Against Your 401(k)
If you have a 401(k) plan that allows you to borrow against funds in your account, you can obtain a loan to fund your home purchase. By law, the loan amount is the maximum of the lesser of one-half your vested interest in the plan or $50,000. If you have less than $20,000 in your 401(k) plan, you can borrow up to the amount of your vested balance but no more than $10,000. Because it’s a loan, you have to repay the borrowed amount including interest as set by your employer. The interest rate on a 401(k) loan is the prime rate plus one percent. There is a downside of borrowing against your 401(k). If you lose your job, your employer may ask you repay the loan within 60 days.
Tapping Your IRA
Tapping into your individual retirement account is another way to raise money for a down payment on a home. The IRS allows you to withdraw up to $10,000 from your IRA for a first-time home purchase. You’ll have to pay income tax on the amount of the withdrawal, and you have up to 120 days to use the funds or face an early withdrawal penalty.
Tax Savings Range:
Depends on the purchase price of the home and what funds you are using to fund the purchase. If planned properly, the savings are thousands!
At LNK Tax Group, we pride ourselves on making sure you have the most amount of money in YOUR pocket (legally, of course). Strategically approaching real estate and stock transactions is a must. Book a free 20 minute consultation with LNK Tax Group and let us help! Don’t make silly mistake that can cost you thousands!
To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and it cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. Always seek advice based on your particular circumstances from an independent advisor.