Author Topic: What to do with home sale proceeds/confused about taxes  (Read 1100 times)

Vegasgirl

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What to do with home sale proceeds/confused about taxes
« on: June 29, 2017, 06:35:33 AM »
So here's a question I can't figure out.  If we were to sell our house and say net $450k.  If we are planning to move and rent for say 5 years before deciding where to settle and buy again is it OK to put the lump sum into an index fund account then withdraw a lump sum to buy a house for cash five years later or would it be a tax mess?  When you withdraw a lump sum are you paying capital gains on the entire amount or just the net increase?  Like if I took out just the original $450k and left earnings in the account would I pay tax at all?

PapaBear

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Re: What to do with home sale proceeds/confused about taxes
« Reply #1 on: June 29, 2017, 08:48:57 AM »
Not completely related to your question, but also important:
If you need the full amount of the money in 5 years, maybe the stock market is not the right place to be and you want to switch to a bit more conservative asset allocation.

I wrote a similar comment to another reader with a 7-year time frame and a bit different situation, but maybe some of the information is also helpful for you:
Quote
You should also note that 7 years is quite a short time frame for any investment in the stock market. Usually, the longer you are invested, the higher is your chance to reach average returns. For me personally, the heat map on portfoliocharts.com helped me a lot to understand the factor the duration of the investment period has on my expected returns. See the graph on https://portfoliocharts.com/portfolio/total-stock-market/
Blue boxes show investment periods with positive real returns, while red boxes show negative real returns. With an investment period of 7 years, 12 of 39 analyzed 7-year-periods had negative or zero real returns! Only with an investment period of 13 years or more, there were no periods with negative real returns.
(Please note, the graph shows real returns and includes inflation, which is a more conservative view [...].
https://forum.mrmoneymustache.com/case-studies/should-i-get-a-mortgage-and-how-am-i-looking-to-retire-in-feb-2024/msg1601705/#msg1601705

BTW, for a 5 year time frame, the chart on portfoliocharts.com shows 15 of 41 investment periods with negative or 0% real returns.

I'm not saying that you should not invest your house sale proceeds, I'm just saying that you should be prepared that there is always the chance of no/negative growth in the short run.
Thus, if you invest in the stock market, it is important to have a plan B and to be flexible - e.g., renting longer and waiting until the market has recovered.
Otherwise, switch to a more conservative asset allocation with less volatility. As a reference, portfoliocharts.com also shows similar graphs for other portfolio allocations.
« Last Edit: June 29, 2017, 08:51:26 AM by PapaBear »

Vegasgirl

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Re: What to do with home sale proceeds/confused about taxes
« Reply #2 on: June 29, 2017, 08:59:00 AM »
ok thanks for the info.

PB - I did see that post.  If the market was in a downturn, we'd have to wait and depending on home prices at the time that would be fine or we could always take out a mortgage and make a house payment until recovery then decide whether or not to pay it off.   I feel like it's opening a can of worms by not just selling one then buying the next right away. 

  I'm just trying to figure out what to do with the proceeds from the sale of the house if there is a decent gap between the sale and the purchase of the next house.  We haven't really decided yet.  I've always thought we would just sell our house in current location then be buying another within say six months but lately I've been thinking about renting for a while and trying out different locations first.  If that happens, I don't want the house money just sitting in my savings account for five years.