Paying taxes on stock gains is unavoidable whether or not you plan to use your gains as a down payment on a house. The tax rate on long-term capital gains, the stocks you held onto for more than one year, is lower than short-term capital gains. If you're a first-time home buyer, you may be able to take advantage of government programs to help with a down payment.
Capital Gains Tax
The tax rate you pay on capital gains on a stock sale depends on how long you owned the shares. If you held onto the stock for greater than one year, you qualify for a lower capital gains tax rate of 15 percent. However, if you sold the shares within one year or less, the IRS taxes you at your ordinary income tax rate, which may be as high as 35 percent.
Selling Stocks to Buy a House
If you realize a gain on your stock holdings, you still have to pay a capital gains tax even if you immediately intend to put those gains to use by purchasing a house. The IRS views these events as mutually exclusive. You get a tax break only if you sell your home and use the proceeds to buy another home within two years of the sale. In such a case, you avoid capital gains tax unless your gain exceeded the maximum allowed for your filing status.
Borrowing Against Your 401(k)
If you have a 401(k) plan that allows you to borrow against funds in your account, you can obtain a loan to fund your home purchase. By law, the loan amount is the maximum of the lesser of one-half your vested interest in the plan or $50,000. If you have less than $20,000 in your 401(k) plan, you can borrow up to the amount of your vested balance but no more than $10,000. Because it's a loan, you have to repay the borrowed amount including interest as set by your employer. The interest rate on a 401(k) loan is the prime rate plus one percent. There is a downside of borrowing against your 401(k). If you lose your job, your employer may ask you repay the loan within 60 days.
Tapping Your IRA
Tapping into your individual retirement account is another way to raise money for a down payment on a home. The IRS allows you to withdraw up to $10,000 from your IRA for a first-time home purchase. You'll have to pay income tax on the amount of the withdrawal, and you have up to 120 days to use the funds or face an early withdrawal penalty.
Down Payment Assistance Programs
Before selling shares to raise money for a down payment, assess your financial circumstances. Determine if you qualify for down payment assistance program through a state, local or nonprofit organization, particularly if you're a first-time home buyer. For example, New York City offers down payment assistance through its HomeFirst Down Payment Assistance Program for those looking to buy a first home. A number of nonprofit organizations, such as Neighborhood Gold, provide grants toward down payments. Unlike some programs, Neighborhood Gold isn't limited to first-time home buyers. If you qualify, you may receive from 3 to 10 percent of the purchase price toward your down payment and closing costs.
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