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I'll be retiring next year, and I want to be in my own home (aging-in-place). Should I sell stocks to buy it outright and thus avoid a mortgage as I move to a fixed income. But what about capital gains? Would a trust help?

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Look at it in reverse. If your home was paid off and you didn't own those stocks, would you take out a mortgage on your home to buy them? –  Kevin Apr 3 at 19:50
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What country are you in, please edit and place a country tag, as tax and other laws differ from country to country. –  Victor Apr 3 at 21:20
    
Look at it this way, if a 50% drop in dividends can still fund your lifestyle, why would you have dormant equity? –  user11865 Apr 3 at 23:25

3 Answers 3

Should I sell stocks to buy it outright and thus avoid a mortgage as I move to a fixed income

No.

Stocks on the whole has outperformed fixed income in terms of returns and the last thing you want to do is kill the golden goose which lays the eggs.

With interest rates at record low and set to stay that way for the next couple of years , you should borrow from the bank to finance the purchase of the house. You can use the dividends from the stocks to pay for the monthly housing installment.

But what about capital gains? Would a trust help

I am guessing you are talking about the tax on capital gains , sorry but I am unable to help you in these area as it is outside my area of expertise

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I assume that this a question for a US taxpayer.

You do not avoid capital gains on the sale of assets such as stocks by setting up a trust. If you are currently living in a house that you own (possibly with a mortgage on it) and will be selling the house and trading down to a cheaper house for your retirement life, the capital gains on the sale of the current house will be nontaxable (subject to some conditions). In any case, since capital gains are taxed at lower rates than income, worrying about taxes on them is less useful than worrying about taxes on your fixed income during retirement. Does the income include Social Security payments which, as many people have pointed out, can make some income be taxed at a marginal rate of as much as 46%? Is it taxable income from a pension plan or Traditional 401k or IRA? Or did you make a killing in your Roth accounts and will be living entirely off the tax-free distributions from those?

With regard to avoiding mortgages, one concern is whether you can get a mortgage. Some lenders don't view pension payments the same way they do salaries, and so you may need to put down a more substantial down payment and choose a duration for the mortgage that is smaller than your life expectancy etc. to be able to qualify for a mortgage.

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Its questions, and insightful answers, to this type of question that make me scratch my head when a kid boasts: "I will never have to do a math word problem outside of school!"

There are many variables to consider here.

  • Traditional mortgages are obtained at a cost beyond interest rates, consider closing costs when doing your analysis.
  • If you need to borrow only a "small" amount, perhaps you can do a no closing cost HELOC rather than a traditional mortgage.
  • Are the stocks reliable dividend payers? It might be wise to use the income from stocks to pay the mortgage, although you are assuming risk in doing so.

For myself, I would not want to have a mortgage (or any other debt) and be in retirement. Would it be possible to work a couple of more years to purchase the home for cash?

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The third comment is a salient point that bullish stock investors fail to understand. Stock is not a steady income stream unless you've got other resources to cover when a slump in the economy tanks your quarterly dividend payouts. We are also talking about retirement. Which implies few years are left to wait out a bad investment choice or the fallout of a bad economy. Life on a fixed income focuses on RELIABILITY vs POTENTIAL GROWTH. It all comes down to tolerance for risk. –  Richard Pascual Apr 5 at 10:18

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