What to do with proceeds from house sale...

liltingbelleOctober 19, 2005

DH and I are considering a temporary (1-2 years) move to London. We were planning to sell our house and move locally this spring anyway, so if we go abroad we'd just sell the house and wait until we're back in the US to buy again.

So what's the best thing to do with the proceeds from the sale (probably just over $100K) in the meantime? Are there good ways to shelter that money so we're not hit with a big tax bill?

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I don't see why there should be a big tax bill or any tax at all. maybe I've gone brain dead but I don't think there is a tax on a profit of 100k. As to what you should do with the money - that depends on what your plans are for your return. Do you want to reinvest all of it in another house? If so, I would keep it fairly liquid - maybe a 12 month CD that you can renew if it turns out that you are away for 2 years.

    Bookmark   October 19, 2005 at 3:10PM
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You might also, since it's a big lump, break it into several CDs w/ different maturation dates.

Bcs you sometimes pay a penalty for early withdrawal from a certificate like that.

So put some in for 6 months, some in for 12, maybe even a smaller amount in for 3 months.

Then, if you needed some of that money (you come home early; disaster strikes, whatever), you'd only have to wait 2.5 months for the 3-month CD to come due.

You will have to pay taxes on interest earned.

But I don't know if you can put the principal in a "tax-deferred interest" type account, and then pull only the principal out again later leaving the interest behind, sheltered from immediate taxation (and hopefully earning interest of its own now, also tax-deferred). And of course since it's the principal you're removing, you wouldn't pay tax on that--theoretically. But I don't know if such a provision exists.

I'd imagine almost any financial planner type person would tell you if that was possible.

    Bookmark   October 21, 2005 at 4:54PM
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As a married couple, you can exclude up to $500K of your gain on the sale of your house. You must have owned and lived in it for two of the last five years.

So you don't have to worry about taxes, probably.

Alternatately, you could also rent out your house for two years, take the income,write off depreciation and expenses, then still sell it and exclude the gains when you return (providing you lived in it for two of the other three of the total five years.)

CDs are a very conservative place to hold money for two years. You will probably lose money to inflation, meaning the $100K you receive back at the end of two years, plus the interest you received over the two years, will probably be less than the $110,250 you will need to just beat 5% inflation.

    Bookmark   October 27, 2005 at 8:31PM
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I know that in the U.S., one can invest in tax-free munis (municipal bonds), but possibly the avoidance of income tax on the earning means that the price of the asset may be relatively higher than on comparable investments where the payouts are taxable.

I can not give advice relative to the tax position of the sale of the home, but it appears that, if it was owner-occupied for a certain amount of time in the past number of years, you can receive the proceeds free of tax. I'd suggest that you check that with I.R.S.

Also ask I.R.S. about tax status of U.S. income while you live abroad - and it varies depending on the amount of time that one's resident abroad, I think. Often there's withholding, I think, before payer can pay you.

If you invest where the amount of principal is guaranteed, that is, the borrower guarantees to return every dollar of the principal (plus rent on the money throughout the period of the loan) at the conclusion of the contract - there's almost always another guarantee that they never happen to mention - they won't give you one dollar more, either.

The rent on the money is all that you'll get with regard to that portion of your asset durig that period.

There are two rats that eat your cheese.

The income tax people want to talk to you annually about every dollar of your income during that period.

In Canada, some kinds of income, employment earnings, resultant pension (apart from a small portion that's deductible) and interest earnings (the kinds that most people earn) are taxed at top rate. However, some kinds are taxed at a lower rate, and the taxation may be deferred - generally, the kinds used by somewhat wealthy people.

Suppose you loaned $10,000. to a bank in a Guaranteed Certificate 15 years ago,for a 5 year term, and renewed it twice. If it came due tomorrow - they'd pay you exactly $10,000.

Which would have bought a decent car 15 years ago: not now.

The other rat that eats your cheese is inflation. If the number of dollars that you invested can't grow, then you must add part of current earnings, more or less the value of inflation, with the invested asset annually in order to maintain the purchasing power of that asset over time.

So - after you pay income tax on your current earnings ...

... and add part of the current earnings to the basic asset in order to maintain purchasing power ...

... you get to keep what's left.

Which in recent years has sometimes been a minus amount. Cause you know what? The rats eat first!

I must admit to a bias - for longer-term investing I prefer to invest into an asset where I expect that the value of the asset may well increase, over time.

Also, where one invests as one usually does, with a small amount saved and added to the invested base regularly over an extended period.

If I can invest into a situation where the amont that the investment pays increases from time to time, I like that even better.

For example, I bought a stock 38 years ago for about $2.08 or $4.15 a share, that paid about 6 cents or a dime, annually.

Prices fluctuated during the period - I remember that once a share could be sold for $56. and somwhat later for $24. (but I'm not sure whether the second figure was after one of the splits) and recently ran around $70. - 80. per share. They had exposure to the Enron fiasco, and were assessed a much larger amount of the settlement than they expected, I think - was that partly because they're a non-U.S. bank, and U.S. banks weren't assessed as heavily? Who knows!

The nice part is that I don't have to answer to the Canada Revenue Agency for the increased value of the shares until I either sell the shares or die - and I don't plan to do either this week or next.

I got a nice surpris earlier this week - the value of annual dividend was increased from $2.64 (was $2.48 not long ago) I think it was, to $2.76 - that was originally about 6 cents to a dime.

Also - that kind of income is taxed so that it takes about $1.25 - $1.30 or so of interest to leave as much in pocket after paying tax as $1.00 of dividends on Canadian stock.

I'm not sure whether the shares split twice or three times during that 38 years.

I'm not about to sell them, any time soon.

Good wishes to you and yours.

ole joyful

P.S. Having some trouble with editing out unwanted letters and adding some where needed - as I'm at the library (son working on a better computer for me) and forgot my glasses. Had a spare set in the car a while ago, but took them into house - and they're still there.

Extra set in brief case - but it's at home, also.


o j

    Bookmark   October 29, 2005 at 3:02PM
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