Cash is King—-But There’s more to the Story
In our first blog of the series, “Luxury Home Buying Strategies Used by Stock and Bond Investors Revealed,” we introduced the idea of using securities to purchase luxury homes in the Silicon Valley. There are many advantages in using this method in today’s competitive real estate environment, but there are “gotchas” that really need to be identified upfront. It’s why consulting with an expert in this arena is critical.
Cash transactions appeal to virtually everyone involved in real estate. Cash purchases can be a necessity when affluent buyers of luxury homes are not adequately served by today’s traditional banking and lending. Borrowing funds can often open the door to potentially endless underwriting headaches, un-welcomed credit disclosure, and appraisal issues for even the most highly qualified candidates. Many seemingly qualified buyers only qualify for insufficient amounts, if they qualify at all. Cash provides for a timely closing, flexibility, and a higher level of predictability.
It is generally assumed that a stock and bond investor’s portfolio will be the source of funds to close. Unfortunately for the home buyer at this crucial time, their advisors typically have little incentive or reason to suggest other possibilities and don’t want to disrupt the transaction. As with the client, most advisors aren’t aware there are other alternatives either. Traditional thinking usually prevails and the investor home buyer liquidates their securities. But then the consequences become apparent to the home buyer.
The client now owes taxes from the sale of securities. Assuming that the stocks or bonds sold have been held for over a year, there will be a 15% long term capital gains tax due. California state residents pay up to an additional 9.3% tax, (however the state tax can be written off against the federal resulting in about a 6% net tax obligation). The California investor who has liquidated securities that create a million dollar long term capital gain is facing a tax bill as large as 21% or $210,000. It will become even more costly in 2013 as there is a 3.8% Medicare Contribution Tax that will be added, and it is possible that the long term capital gains tax may increase to 20%.
The lack of having experienced and informed advisors has created a costly situation for the newly affluent investor that has participated in a successful IPO or for the long term holder of securities with a low cost basis that wants to buy a luxury property. But this unwanted result can be avoided. The next post will discuss the solution.
We hope you’ve enjoyed Part 2 of our series! You are invited to explore future posts discussing these strategies and more in the next weeks! For more information on these programs, contact Dawn Thomas today at 650-947-4661. She’ll be delighted to put you into touch with our local partner who offers solutions to the affluent buyer.
This blog is courtesy of The Dawn Thomas Team who is an award-winning Real Estate Agent team at Intero Real Estate Services in Los Altos 650-701-7822. We help nice people with selling and buying homes from Palo Alto to West San Jose!