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Richard Bloom, CFP®

Thinking About Making a Move? Important Financial Considerations When Selling or Buying a Home

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As we head into peak residential real estate season, you may be thinking about whether it’s the right time to list your home for sale or to go house hunting. In addition to considering how local market circumstances such as job growth, mortgage rates, and tax incentives influence your timing, you also want to think about how selling or buying a home may impact your long-term financial plan. In this article, we explore important questions both sellers and buyers should ask themselves when considering a move.

 
 

For Sellers

1. How much will it cost to sell your house?

A good rule of thumb is to be prepared to pay costs of up to 10% of your home price to sell your house.  This includes expenses associated with getting your house in shape to show, such as cleaning and painting, realtor commissions, closing costs including transfer tax and legal fees, and repair costs or concessions.  

Depending on how long you owned the house and whether it was your primary residence, you may also owe taxes on the profit from your home sale. If you’ve owned your home for at least two years and lived in it for at least two of the last five years, you can exclude up to $250,000 of the profit as an individual or $500,000 as a married couple, if you file a joint tax return.  If you’ve owned your home for at least one year, any profit will be taxed as a long-term capital gain.

2. Where would you go next?

If you’re planning to buy another home, consider the cost of maintaining that new house on an annual basis, from mortgage related expenses and property taxes to maintenance and repairs.

If your plan is to rent, you may need to figure out how to manage the potentially large inflow of cash from the sale of your home. This inflow should be incorporated into your long-term financial plan and aligned with your goals, which for many of you is retirement. If you allocate some of this cash to investments, it may be worthwhile to seek guidance from a Financial Advisor on the most efficient way to deploy it in such a volatile stock market.

3. How will you pick a buyer?

The attractiveness of an offer may depend on your risk tolerance and your timeline. Cash offers may be attractive because they don’t depend on bank underwriting or appraisals and can often be completed more quickly. Though cash offers may mean a lower selling price, they may be more likely to close without issues. 

For Buyers

Many areas of the country are experiencing a seller’s market, where there are more prospective buyers than there are homes for sales. When housing inventory is low, buyers have fewer choices and may have to pay higher prices or be more willing to make concessions. Understanding how these factors impact your financial plan can help you make bidding and buying decisions with greater confidence.

1. How do you decide how much to bid?

Often, the response to this question is, “How much can you afford?” If you anticipate getting a mortgage, the Federal Housing Administration generally uses a 43% debt-to-income (DTI) ratio as a guideline for approving mortgages.  Keep in mind that getting approved for a mortgage does not guarantee you will be able to afford the payments, so it is critical to be sure you understand, and are comfortable with, the level of financial risk you will be taking on. 

Once you understand how much you can afford, you will have a clearer picture of your price range and how much you can bid.  

2. How much will you need to set aside as a down payment?

If you are able to put down 20% of your home price, you may be able to avoid paying private mortgage insurance. There may, however, be situations where you opt against a 20% down payment. Your Financial Advisor may be able to advise you on what down payment makes the most sense for your situation. 

3. What other costs do you need to budget for?

The costs associated with buying a house go beyond the down payment and the monthly mortgage payments. You will need to factor in expenses such as closing costs, which are all the fees associated with the mortgage, as well as title insurance, NY state mortgage tax and mansion tax for purchases over $1 million, property taxes, homeowner’s and mortgage insurance, homeowner’s association fees, and relocation expenses. You will also need to plan for routine and unexpected home maintenance and repairs. 

Key Takeaways

As you can see, the financial implications of selling or buying a home go far beyond the purchase price and can have long-term impacts on your financial plan and overall wealth strategy.

When it comes down to it, the best time to sell or buy is the time that works best for you. Selling or buying a home is not just a financial decision, but a personal one. It’s important to make sure the timing makes sense for you from the standpoint of lifestyle and emotional preparedness. Whether you’re thinking about selling or buying a home, working with a Financial Advisor who understands your circumstances, priorities, and long-term goals can help you formulate a plan that is designed to protect your vision of the future.

About the Author

Richard Bloom, CFP® is a Financial Advisor with The MayerGelwarg Group at Morgan Stanley. He works with our clients to gain a full understanding of their financial goals and coordinates wealth planning analyses on their behalf to clarify the long-term financial implications of the decisions they make today. Rich is a Certified Financial Planner™, earning that designation through New York University, and is an active member of the Estate Planning Council of New York City and the Financial Planning Association of New York. He can be reached by email at Richard.Bloom@morganstanley.com or by telephone at (212) 893-7597.

DISCLOSURES

Article by Morgan Stanley and provided courtesy of Morgan Stanley Financial Advisor.

Richard Bloom is a Financial Advisor in 1290 Avenue of the Americas, New York, NY 10104 at Morgan Stanley Smith Barney LLC (“Morgan Stanley”). 

This article has been prepared for informational purposes only. The information and data in the article have been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning, charitable giving, philanthropic planning and other legal matters.

Richard Bloom may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where he is registered or excluded or exempted from registration, http://brokercheck.finra.org/Search/Search.aspx.

© 2022 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 4399252 2/2023

Awarded Equity In Your Company? 5 Key Financial Considerations

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As we approach the end of the year, bonuses and tax planning are at the top of many employees’ minds.  Without proper planning, equity compensation grants can seem like a double-edged sword. On the one hand, the equity grants you’ve been awarded represent the potential for significant wealth. On the other, they may have a range of complex financial and tax planning considerations. So, what should you be thinking about when managing your equity compensation?

Here are five important things to consider when strategizing with your team of professional advisors on how to manage your equity compensation grants.*

1. Make sure you know what kind of equity grant you’ve received.

Knowing what kind of equity grant you’ve been awarded will help you understand when and how you may owe taxes. Nonqualified stock options (NQSOs) are a common type of equity grant that are awarded at a pre-determined exercise price, also known as the strike price. Other types of equity compensation may include incentive stock options (ISOs), restricted stock units, and performance shares.

2. Keep track of when your equity compensation grants vest.

The vesting period defines the amount of time you must hold the equity grant before it vests and generally is no longer forfeitable. Typically, the equity grant will vest over a period of time, achievement of performance goals or a combination of both.

3. Understand the tax consequences of your equity compensation grants.

NQSOs do not qualify for special tax treatment so the spread between the strike price and the fair market value (FMV) of the stock at the time of exercise is considered ordinary income subject to federal, state, and local income taxes and payroll taxes. ISOs do not generally result in taxable income when they are exercised, but they may result in ordinary income or capital gain at the time the shares are sold depending on how long the shares have been held. However, the spread between the strike price and the FMV of the stock at the time of exercise may be considered income for Alternative Minimum Tax (AMT) purposes.

With restricted stock units or stock performance awards, you are generally subject to ordinary income tax when the equity grants vest.  The type of equity grant and terms of your company’s  plan will determine when and how it is settled and taxed. 

4. Determine whether a section 83(b) election makes sense for you.

If you make a section 83(b) election, you recognize taxable income in the year the equity award was granted, rather than in the year it is no longer subject to a substantial risk of forfeiture. Typically, a section 83(b) election can only be filed in connection with the grant of certain types of equity awards, such as, restricted stock and performance shares. The section 83(b) election needs to be made within 30 days of receiving the equity grant. If you choose to make a section 83(b) election, you will recognize ordinary income on the excess of the FMV of the equity award at the time of grant over the amount paid, if any. By making an 83(b) election, you have the potential of reducing your overall tax paid if your company grows. When you eventually sell the shares underlying your equity award, you may recognize capital gain or loss. Assuming you sell the shares more than one year after grant, any gain would be treated as a long-term capital gain, which is taxed at a lower rate, than ordinary income. 

5. Find out if your shares qualify as Qualified Small Business Stock.

You may be able to exclude up to 100% of any gain from the sale or exchange of qualified small business stock (“QSBS”) acquired after September 27, 2010 and held for more than five years.  The maximum amount of gain excluded is generally allowed up to $10 million or ten times the cost of the stock. The five-year holding period is for shares–not options–so if QSBS treatment is a future possibility, exercising options early and along the way may make sense. It may also be useful to negotiate an accelerated vesting schedule to start the clock on the holding period. QSBS rules are complex and include some key requirements for taking advantage of this exclusion, so consulting a tax advisor for guidance is advisable.

Key Takeaways

Deciding how to manage your equity grants can be a complex undertaking, especially if they are a significant component of your compensation package and your company stock represents a large portion of your overall wealth. Understanding the financial and tax implications of your equity compensation–and how they impact your comprehensive wealth management strategy–is critical. Working closely with your professional advisors–including your CPA, attorney, and a financial advisor who understands the nuances of equity compensation plans–can help you create a customized plan for achieving the future you envision for yourself and your loved ones.

About the Author

Richard Bloom, CFP® is a Financial Advisor, Dedicated Equity Plan Specialist with The MayerGelwarg Group at Morgan Stanley. As a Dedicated Equity Plan Specialist, Rich utilizes a unique set of skills to help clients who receive compensation benefits in the form of company stock. His deep understanding of the tax ramifications surrounding stock awards and grants qualifies Rich to work cohesively with clients’ CPAs to develop long-term, tax efficient diversification strategies. He can be reached by email at Richard.Bloom@morganstanley.com or by telephone at (212) 893-7597.

* Strategies are subject to individual client goals, objectives, and suitability. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Only US federal income tax information is provided herein, and other taxes may apply depending on an investor’s particular circumstances. Investors should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.  

© 2021 Morgan Stanley Smith Barney LLC. Member SIPC.

CRC 3754886 09/2021