By Alex Weiss CFP® | President & Wealth Manager
One of the questions we get from clients is about property transitions. “I’m upgrading my house and buying a different vacation property. It’s going to cost a few million bucks, and eventually, I’m going to sell the one I’m currently in, but I don’t want to move first.”
These clients often have plenty of money and don’t need to take a loan for the new property, but they’d have to sell some investments and take a capital gain. Since they’re only going to need this money for a short period of time, there’s a better approach to consider.
Where a lot of planners fall short – especially investment-only people – is that they simply recommend selling investments, taking the tax hit, and cutting the check. What they miss is calculating whether it’s better to pay a little bit of interest instead, utilizing your current strong income or assets to take out a loan for that short period.
This strategy prevents forcing a sale on an appreciated asset and taking a tax hit that you can’t undo. You can get into the new property, sell your current home at your convenience, and then pay off the debt.
The critical factor here is understanding the timing and tax ramifications of these “temporary loans.” You know you’re eventually going to sell the first house – you might not know exactly when, but you can make a reasonable estimate to understand the financial impact. Less money spent on interest or taxes is always better.
Sometimes, it’s simply a timing issue. If you’re buying that boat or house in November or December, you might choose to borrow money for 30 or 60 days. Then, upon the expiration of the tax year, you can sell some assets in the first quarter, giving yourself a whole year to pay the taxes on that transaction.
This approach requires more planning but often results in significant savings compared to the simplistic “sell and buy” strategy that triggers immediate capital gains.
