GBE Clients,
We often hear the comment: I just sold my house, now what?
TAX CONFUSION
Due to a myriad of reasons, people are often confused. Many are under the belief the proceeds from this sale MUST be reinvested into a new house to remain tax-free. This is not true! (Reinvested funds is a rule for selling rental properties, farm land, or other income producing real estate. Your primary residence is different!)
SECTION 121 EXCLUSION
Generally speaking, if you’ve lived in your house for at least two years (two of the last five years) you may exclude up to $250,000 (single) or $500,000 (married) of GAIN in a tax-free manner.
Example: Sold house for $1 million. Purchased house three years ago for $900,000. The $100,000 gain is tax-free.
RECEIVED MONEY AT CLOSING NOW WHAT
Since reinvesting the funds into a new mortgage is not required, this opens up a number of financial options.
Generally, if moving to a new house under current mortgage rates (as of 11/1/2021) – we recommend a 20% down payment and invest the rest. Generally, if moving to a rental – invest it all.
TIME VALUE OF MONEY
The analysis below is a generic expression of averages. In no way is it a guaranteed rate of return. Many different scenarios may apply to you. Seek advice from your GBE advisor on tax planning, investments, age, risk, and other factors!
SCENARIOS
Now that your primary residence has closed tax-free and you’ve put 20% down on a new mortgage; let’s say you have $260,000 left.
PAY IT ALL AGAINST NEW MORTAGE
$260k against current mortgage rates (as of 11/1/2021) will save you approx. $140,000 in interest over 30 years
INVESTMENT PORTFOLIO
(contact GBE for investment planning)
$260k invested at 3% (bad historical rate) for 30 years will earn you approx. $290,000
$260k invested at 5% (avg historical rate ) for 30 years will earn you approx. $919,000
$260k invested at 7% (decent historical rate) for 30 years will earn you approx. $1,800,000
STRATEGY
The numbers are staggering. It appears in many cases a viable strategy in the current mortgage market environment is to leave your new home loan as-is and invest the rest. And if you’ve moved into a rental property, it may make sense to invest it all.