Keep cash for down payment or invest and pay capital gains later?

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bogler52
Posts: 45
Joined: Sat Dec 31, 2016 3:07 pm

Keep cash for down payment or invest and pay capital gains later?

Post by bogler52 »

Hi All,

My soon-to-be wife and I are trying to understand what makes more sense for a future downpayment (i.e. five-plus years):

1. Invest our savings now (minus rainy-day fund) and pay capital gains taxes later
2. Keep accumulating cash in our savings account

I spoke with a financial advisor who recommended keeping cash if it's anything under 10 years to use (aka Option 2), and another who recommended Option 1. We're open to hearing other options / recommendations.

We own our condo in a HCOL area in the North East. We'll likely be here for five-plus years and could have one child here if needed. We plan to stay in this general area long-term due to family ties. Ultimately we would like a single-family home and thus the question about downpayment.

Two other housing-related things to note:

- We might have the option to my buy family home from my parents in the next 5-10 years (possibly sooner). It's likely worth $1.5m+
- My family has a vacation home we love and will either eventually inherit, or would want to buy from them should they want to sell it.

Our longterm goals are to keep setting ourselves up for success in retirement (i.e., have enough for perpetuity) and not be stressed about having enough money in the now.

Current stats / details:
- wife and I are both 31
- ~$32k in cash in a "high-interest" savings account ~1.25%
- Interest rate on our condo is 2.75%. We'd love to keep this place as a long-term rental when we eventually move.
- I bought the condo last year from family at an appraised FMV, but off-market. Appraisal was $465k and we set the purchase price at $425k. I received a gift of equity for ~$107k so my mortgage was $318k. Mortgage + condo fee just under $2k / month
- We are DINKS ($86k, $150k + $150k OTE variable from commissions). We only budget from salary including savings goals. Commissions are "funny money" to accelerate savings goals, pay for trips, gifts, our wedding, etc.
- We max every tax advantaged account plus invest more.
- Current net worth ~$507k (including accounting for our mortgage and car payment). No other debts currently. Mixture of retirement + investments.

I understand the argument for rent-vs-buy, and recognize the "hidden costs" of ownership. The homes in our area are very expensive (one of the highest HOCL in the country) so to eventually get into a single family home we'll need lots of cash and / or to sell our condo.

Thanks for your input,
bogler52
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grabiner
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Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Keep cash for down payment or invest and pay capital gains later?

Post by grabiner »

See Placing cash needs in a tax-advantaged account on the wiki.

If your taxable account is double the amount you will need to spend, then it is reasonable to leave the taxable account in stock, as long as your total allocation to stock remains consistent with your risk tolerance. If you decide that you want to sell bonds, rather than stock, when you make the down payment, you can sell taxable stock and move an equal amount from bonds to stock in your 401(k).
Wiki David Grabiner
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