I am in the very early stages of buying my first house. I am planning to start looking at properties this summer, and maybe closing on a house a year from now. A significant chunk of my savings, which I plan to use for the down-payment, is in my brokerage account and some mutual funds. If I sell these to make a down payment, do I still have to pay capital gains on them? Better yet, can I simply give the shares to the bank in lieu of cash, thereby avoiding capital gains altogether?
Yes to the first question. One has nothing to do with the other. If you liquidate some investments from a brokerage account, you will have to pay any capital gains tax if there are any. What you do with the proceeds is irrelevant. As to the second question, I doubt if the bank will accept securities in lieu of cash for a down payment. Besides, how would you make the transfer without a change of ownership? No, pay the taxes and get the IRS off your back.
Not sure what he means. But if capital gains are a real issue AND you have a high risk tolerance AND you intend to hold onto the stocks for a while AND if you’ve got really, really good financial discipline there may be a way not to realize the gains now and still have the cash.
Specifically, depending on the stocks and what kind of account they are in, you may be able to get a margin loan against them. Some brokerage firms will even make margin loans against some mutual funds. Basically, you can borrow up to half the value of the stocks at a low rate – the broker call rate is 4% now and you’ll typically pay .75 to 1 percent on top of that.
But it’s risky. If the value of the stocks and or funds decline the broker may make a margin call, in which you have to put up additional collateral or the broker will sell the stocks to make sure the loan is good. Also, many banks hate it when people finance their down payments this way – you’ll want to have an excellent credit rating and let your financing partner know in advance what you’re planning or you’ll be in for a nasty surprise come settlement day.
To be clear, borrowing on margin to make a down payment on an asset which is also highly levered (your house) is a poor idea for most people most of the time. But the idea exists and if your gains are extremely high relative to the value of the accounts (say, if you got cheap employee stock before your company went public and have a near-zero cost basis) it might be worth a look.
Well, I have absolutely no intention of borrowing on margin to finance the house, as I would just need to borrow again to pay for all the ulcer medicine and sleeping pills.
The capital gains are not huge, and are all long-term, so it’s not a huge amount. But if it can be avoided then it simply means by downpayment is bigger.
If you have had some or all of these funds a long time, you MIGHT have a nice situation.
Mutual funds are (usually) required to report capital gains that occur on their stock sales regularly–you may have had those, and should have reported them on your tax returns annually.
If you did that, then those past figures are thrown into the mix somehow–you’ll need to study up on that. It’s possible to have a “real” profit when you sell them but a loss for tax purposes because of those previous tax years.
That was the point. You can’t do it. If you want to transfer the securities to the bank, you have to sell the securities, which will trigger any capital gains tax if they exist. Since you say the gains are all long-term and not huge, just pay it.
That doesn’t seem right to me. My parents have given me shares of stock as gifts before, and they didn’t have to liquidate them or pay capital gains. (In fact, I got to claim the capital losses on some worthless RCN shares that they gave me which I sold, even though I didn’t actually buy them.) So it seems to me that it should, in theory, be feasable, if the bank is willing to go along with it. Perhaps I better start talking to actual bank people to get the grisly details.
Ahh…special case. Your parents gave you a gift, and included in that gift was the capital gains. One is allowed to give a person a gift up to a certain point(I believe the value is up to $10,000 a year) without incurring tax consequences. After the threshold has been exceeded, the receipient must pay taxes on the gift. This means if your parents come into money and give you 1.000.000 cash, you have to pay taxes on it, but they can give you a gift of 5,000 without incurring tax consequences. This means your parents are better off giving you stock that has appreciated than selling it and giving you the cash.
Let’s say they bought $1,000 worth of Starbuck’s stock a few years ago. That stock is worth $6,000 now. If they wish to give you a gift, and sell the stock, they would pay roughly $1,000 taxes on the gains ( (6000-1000) * .20 ), and could therefore give you a gift of $5,000. Alternately, they could give you the stock, valued at $6,000, so when you sell it, you sell it at its “stepped up value”, meaning no capital gains are due*. Alternately, they could give you a stock worth 1,000 which then plumments to nothing; you would get the capital lose because the value of the stock was $1,000 when you received it.
Pleasse note that the description of gift taxes above is meant to be cursory, and I didn’t verify the percentages of capital gains or the gift caps; someone may come along with more accurate numbers.
Those are the rules for gifts, which don’t apply to banks at all. The answer to your question is that you’ll have to recognize the capital gains and pay taxes on them or avoid selling the assets (using the margin account that Manhattan describes). Since you would be transfering the stock in return for something, the IRS would be unlikely to see it as a gift and would therefore be inclined to impose capital gains taxes even if you could convince the bank to accept stock instead of cash (a rather unlikely occurance, I fear).
please note that I believe that the stock steps up in value when given as a gift, but I’m on my first cup of coffee, too, so please chat with a tax advisor before making purchases.