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How to Sell Stock to Buy a House

"What is the best way to sell stock and buy a house in a tax efficient manner? Is there a way to minimize the tax burden through these transactions?"

Great questions and yes, there are things to consider to make sure that you sell the stock in a tax efficient manner.  There are several items that you need to take into consideration.

The first is whether you have any capital losses that you are carrying over from your previous tax year.  An example is usually helpful.  Let’s say you sold stock last year and experienced a cumulative loss of $5000.  You would only have been allowed to deduct $3000 of that last year and will be carrying forward a $2000 loss for this year.  This loss can be used to offset any gains that you have this year when you sell stock.

The second thing to consider is what price you purchased each share of stock for and what it is selling for today.  You may or may not have purchased all the shares at the same time.  If you purchased them at different times you own what we refer to as different lots of stock.  Some of these lots may be worth more today than what you paid for them and some may be worth less.  You can choose which lots you want to sell to minimize your taxes.  For instance, if you already have a $2000 capital loss carryover that we discussed above, then you may want to sell the lots with gains that total $2000.  This way you do not owe any tax.  You could also sell the lots that represent a loss and deduct this from your income for this year remembering that you can only deduct a maximum of $3000 per year and this includes your capital loss carryover.  Your strategy here depends on your tax bracket and future plans for your investments.

Finally, if you are in the fortunate position where you are going to have to recognize gains (because all your investments appreciated), then make sure you are selling investments that you have held for more than one year.  By selling only stocks that you have held for more than one year you will receive favorable tax rates on what the IRS refers to as long term capital gains.  The tax on these gains will be significantly less than short term capital gains that are taxed as ordinary income and thus at you marginal tax rate.  If at all possible you should absolutely avoid selling within one year unless of course you have a strong reason to believe the stock will be declining.

There is a little more to it but overall, I am hoping this gives you a good idea of things that you should be considering.  These items are what financial advisors and CPA’s look at when making decisions such as this with our clients.  These represent a fun challenge to minimize the tax impact of doing exactly what you are looking to accomplish.  Best of luck with your new home purchase!