Surprise! Buying a home--tax issues in selling investments for DP? What else?

[kork13]

So for the last few years, I've been saving a fair chunk towards a downpayment for a house, and at present I've got $60k saved. I've invested most all of it (expecting for this purchase to be a few years away), but as it happens, I think I'm going to actually buy a home this summer when I move to my next assignment. This is a long story (I can explain if necessary), but basically, I've been looking at apartments for months, and the numbers are just leaning very heavily toward a home purchase being the smarter way to go. I'm looking to buy a $130k-$170k house, and plan to make a $40k downpayment (~25%), and based on my bank's pre-approval estimate, closing costs would be an extra $5k-ish.

To head off some of the immediate questions you may have: I've got a solid emergency fund, the monthly payment will be ~15% of my income, retirement is on track, and my savings plan will continue without impact, totaling ~40% of my income (including retirement, investments, and cash savings). Besides buying a car this summer as well (I've got additional cash to PIF), this is the only significant savings objective I've got anywhere on the horizon. I'm single, 26, in the military, and moving to Oklahoma City…the base there is very much a "home base" for my career field, so it's a good assumption that I'll be spending many years and multiple tours there.

Anyway, I wanted your opinion on what I should do about this (currently invested) downpayment. I know that I will have to sell off a bunch of my holdings to come up with the downpayment money. Is there any particular way that will be better/smarter for me to do this? I know that selling off $45k of investments is a somewhat major taxable event. Thankfully, I changed investment companies last year, so I've already paid the taxes on those previous gains, and I'll only have to pay taxes on the additional $5k-$6k in gains I've had in the last 10 months. Is there any way to minimize the tax hit, however? (Side thought: Between a trans-continental move, selling these investments, buying a car and a home, and a deployment earlier this year, my taxes this year are going to be greeeeaaaaaat....... ugh... )

Also, is there anything that I'm blatantly missing in my thinking here? I'm expect that most of the regulars here know that I've always viewed home ownership as a more distant prospect for me, so I'll admit that it was a bit of a surprise for me in coming to realize that buying a home right now really is the best way to go for me….and that certainly opens me up to overlooking something, so I'm totally open to any thoughts/input the SavingAdvice experts may have.

[kv968]

Anyway, I wanted your opinion on what I should do about this (currently invested) downpayment. I know that I will have to sell off a bunch of my holdings to come up with the downpayment money. Is there any particular way that will be better/smarter for me to do this? I know that selling off $45k of investments is a somewhat major taxable event. Thankfully, I changed investment companies last year, so I've already paid the taxes on those previous gains, and I'll only have to pay taxes on the additional $5k-$6k in gains I've had in the last 10 months. Is there any way to minimize the tax hit, however? (Side thought: Between a trans-continental move, selling these investments, buying a car and a home, and a deployment earlier this year, my taxes this year are going to be greeeeaaaaaat....... ugh... )

Also, is there anything that I'm blatantly missing in my thinking here?

Kork, congrats and good luck on the house.

As far as "blatantly missing" anything...the bolded part.

I don't know when you're planning on selling those investments but since you've had them for 10 months, if you can hold off for another 2 then you'd only pay 15% long term capital gains on them instead of your going tax rate. Let's just hope they don't drop between now and then and/or we don't fall of the "fiscal cliff"

[jpg7n16]

I know that selling off $45k of investments is a somewhat major taxable event.

Not always.

Thankfully, I changed investment companies last year, so I've already paid the taxes on those previous gains, and I'll only have to pay taxes on the additional $5k-$6k in gains I've had in the last 10 months.

Wait a sec - why did you have to pay tax? Did you liquidate everything and repurchase??

Most investment firms will transfer securities in kind, which is not a taxable event.

Is there any way to minimize the tax hit, however?

See kv's post above and wait it out

Also, is there anything that I'm blatantly missing in my thinking here?

If you really already paid tax on the full balance, and only have gains of $5-6k, your max tax liability would be like $1250-1500. You only pay tax on gain, not on the full amount.

If you're able to save 40% of your income, then there should be no problem whatsoever coming up with those funds to pay the taxes.

[Like2Plan]

I'm not sure how much you plan to spend on your car, but PENFED has a rate of 1.99% (new or used). Could you divert your cash savings for your vehicle over to the house DP and finance the car? You could then cash the securites in on your own time line to pay off your vehicle loan.

[kork13]

I don't know when you're planning on selling those investments but since you've had them for 10 months, if you can hold off for another 2 then you'd only pay 15% long term capital gains on them instead of your going tax rate. Let's just hope they don't drop between now and then and/or we don't fall of the "fiscal cliff"

I've considered this, but I don't really see a good way to prevent this. I would still need a place to live between August and October. My only other option would be to not sell any of my investments at all, finance my car purchase 100% (hopefully at a low rate, I do see some dealer offers of 1.9%), and use the saved cash (~$30k) as my downpayment. But then adding the additional car loan to my credit could hurt my credit score for getting the home's mortgage, no?. I just got my credit scores from all 3 bureaus when I applied for the pre-approval....792 across the board. I don't know how much getting a new car loan would impact that, but just a consideration.

Another point here... I've continued to add more money into these investments (~$6k) since I moved them over. The 1-year period applies to each purchase individually, right? So the gains on shares I bought in December or February would still be considered short term gains anyway.

Wait a sec - why did you have to pay tax? Did you liquidate everything and repurchase??

Most investment firms will transfer securities in kind, which is not a taxable event.

I did have that option, but it would have kept me in the same mutual funds (USAA funds)... I wanted to move my money into Vanguard's MF's & ETF's. So yea, I had to liquidate and repurchase. Thankfully, it was at a relative low-point in the markets (early Oct'11), so at the time I only realized ~$6k in taxed dividends and gains.

[kork13]

Actually, another thought that could maybe reduce the tax impact.... I've heard that there's a way to specify particular purchases of stock that you want to sell (as opposed to first-in/first-out)... Can you do that with mutual funds as well? Would it work if I were to select the highest-cost purchases that I've made as the lots that I wanted to sell? If I understand it correctly, that would allow me to sell the specific shares with the highest basis (and thus the lowest gains), and minimize the tax exposure. Is that correct? That's is a little more "out there", and definitely fairly complex... But how good of an idea would that be?

I'm not sure how much you plan to spend on your car, but PENFED has a rate of 1.99% (new or used). Could you divert your cash savings for your vehicle over to the house DP and finance the car? You could then cash the securites in on your own time line to pay off your vehicle loan.

Looks like we were thinking the same thing at the same time... I suppose going that route wouldn't be terrible, though I'd really prefer to not have a car loan. But yea, I could use that as an option, or do a combination approach where I partly finance the car and sell a lower amount of the investments. But if I finance the car only to pay off the car loan with the investments, it just seems like it's about the same result in either case...why use the intermediate step of getting the car loan?

[Like2Plan]

Looks like we were thinking the same thing at the same time... I suppose going that route wouldn't be terrible, though I'd really prefer to not have a car loan. But yea, I could use that as an option, or do a combination approach where I partly finance the car and sell a lower amount of the investments. But if I finance the car only to pay off the car loan with the investments, it just seems like it's about the same result in either case...why use the intermediate step of getting the car loan?

You could stretch it out so it is long term gains vs short term gains and also you could move some of the gains into the next tax year (or more tax years if need be).
(By that I mean--delay cashing in some of the securities into the next tax year)

[creditcardfree]

I'm not an expert on long/short term gains, but with a deployment earlier in the year won't you have less taxable income for the year, since combat pay is not taxed? This might help offset any taxes incurred on the sale of your investments.

I would not take a loan out on a vehicle at the same time as you apply for a mortgage, but a lender might be the best one to help you.

Have you heard of Homes for Heroes for buying and selling home? Realtors give back part (25%)of their commission if you are in the military, as well as to service personnel such as nurses, emt's, firefighters and teachers. We just used a realtor associated with them and saved just over $2000 in the purchase of our home. We also used Wells Fargo rather than USAA because we got a better rate (30 year VA adjustable at 2.75%) and they paid our appraisal fee. We went with the adjustable since we are sure to move before the rate adjusts in 5 years.

Good luck with your home purchase!

[kv968]

Actually, another thought that could maybe reduce the tax impact.... I've heard that there's a way to specify particular purchases of stock that you want to sell (as opposed to first-in/first-out)... Can you do that with mutual funds as well? Would it work if I were to select the highest-cost purchases that I've made as the lots that I wanted to sell? If I understand it correctly, that would allow me to sell the specific shares with the highest basis (and thus the lowest gains), and minimize the tax exposure. Is that correct? That's is a little more "out there", and definitely fairly complex... But how good of an idea would that be?

If you could manage to get it all done with selling just some of your investments and let the others ride for the full 12 months you could select the ones with a higher basis to sell first. It's called "Specific Identification":

Vanguard's Cost Basis

However if you go that route with some of the investments I don't think you can revert back to FIFO or LIFO with the others after that, you have to stick with the same method. I'm not sure, and someone please correct me if I'm wrong, but I think that's the accounting method that once you use it, you can't go back and change it with the other holdings. Regardless, it really wouldn't make a difference in your case since after the first lot you sold it seems as if you'd sell the rest after the 12 months anyway.