Investing Strategies to Avoid Second Home Taxes

Published August 1st, 2022
Reading Time: 4 minutes
Written by: The Zoe Team

Buying your new home comes first, thinking about the elegant furniture comes second. Discover how you can implement investment strategies to avoid second home taxes that work as bridges for you to wake up to the glamorous view you deserve. 

If you own a home, you’re not alone! Nearly 65% of the U.S. population owns a home. Real estate is, therefore, among the most significant financial assets for many investors. That said, only about 4.3% of Americans own a second home. In fact, for many Americans, planning to buy a new home without an all-cash offer can seem near impossible. Fortunately, various investing strategies exist to avoid second home taxes or those associated with upgrading your current home.

You might be thinking, “Shouldn’t I just get another mortgage in order to buy my next home?” While true, it might be an unnecessary hassle for some. Did you know that you can work with your bank or brokerage firm to borrow from yourself? You can take margin loans or securities-based lines of credit to borrow against your portfolio. This is a tax-smart investing strategy used by those in the know to avoid taxes when purchasing a second home.

Here are a few investing strategies you can learn to avoid second home taxes!

Two Investing Strategies to Avoid Second Home Taxes

To avoid being subject to taxes when buying a second home or upgrading a home, consider these two options:

  1. Portfolio Loans: Borrowing a margin loan or a securities-based line of credit against your portfolio to put an offer for a new house without having to sell your portfolio (and trigger taxes).
  2. If upgrading to a bigger home, consider waiting until your current home has been sold before putting an offer on another one.

What Do These Choices Mean and Imply?

Portfolio loans mean using investments as collateral. This allows you to retrieve the cash you need without actually selling an investment in your portfolio. If you were to apply this strategy, you would ask your bank or brokerage firm to organize a margin loan or a securities-backed line of credit derived from your investments. Additionally, this is a relatively cheap tax-smart investing strategy, relative to a mortgage because margin loans are offered at around 3%.

Margin Loans Break Down: 

  • Generally, you need at least $2,000 in cash or marginable securities (i.e., stocks and bonds). 
  • Can typically borrow up to 50% of the investment’s value (the one you will take the loan from).

Assets should be diversified if you are taking margin loans to avoid owing more than you borrowed. 

Securities-Based Lines of Credit Breakdown:

  • Generally, you need $100,000 initial advance. 
  • The loan is secured after pledging the value of an asset; you claim the value of an asset in your portfolio as collateral for the loan to buy your house. 
  • Typically a good strategy for short-term loans is a bridge between transactions. In this case, buying a new home. 
  • A good strategy when you need “immediate” access. 

The risk involved with this strategy considers the value of the investment you want to use as collateral. If the value of this investment drops, you will be forced to make up that difference. This is an important strategy to review with your financial advisor before executing. 

Further Portfolio Loan Considerations When Purchasing a Home 

  • It only applies to some taxable accounts. 
  • The mix of assets available in your portfolio determines how much you can borrow.
  • Be careful with this strategy: the interest you pay is only tax deductible for interest against the income you earn from the investment you are borrowing.  
  • You must stick to the original amount you had planned to borrow. Exceeding this projected value will result in paying for the difference.  

If you opt for selling your current house, before putting an offer on another oneThis strategy implies using the portfolio loan strategy as the first step to selling your house and proceeding to buy a new one. The process of considering portfolio loans to buy a new home would be as follows: 

  1. Plan to use your investments as collateral. 
  2. Sell a new home.
  3. Purchase your new home using what you received from the home sale (to pay for the amount you borrowed from your portfolio). 

The common advice is to sell your current house when its fixed mortgage is similar or the same as the margin loan or securities-based line of credit.

Buying a Second Home through at a Glance

Using your investments as collateral not only helps you be subject to taxes but also helps you score lower interest rates than traditional loans, which would lead to greater expenses. 

Plan ahead and keep building that home that is waiting for your arrival. Now that you know a couple of ways to avoid common roadblocks, the final step would be to ask your financial advisor about their thoughts on these investing strategies to avoid second home taxes.

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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