How to Reinvest Home Sale Proceeds

Selling a home can be as big of an event as buying a home.  However, where buying a home leaves you with a place to live, selling a home, hopefully, leaves you with a lot of cash in your pocket.  Cash itself will not grow into anything.  In actuality, as inflation continues to occur, the cash you possess today will be worth less in the future.  As such, unless you invest your money, you have no chance of growing your money.

Because home sales can create such a large amount of cash for you, your primary concern should be your tax consequences.  Fortunately, there are some tax exclusions for certain sales.  Before you sell you home, speak with a tax professional to discover if you qualify for certain tax benefits and exemptions. 

If you are selling your primary residence (which means that you must have lived in the house for two of the last five years before the sale) and you are single, you can exempt up to $250,000 of the profits from the sale.  If you are married, you can exempt up to $500,000 of the profits from the sale.  The money that is exempted is tax free.

If you are selling an investment property, a 1031 exchange or “like kind” exchange may be the way to go.  Again, speak with a tax professional before attempting this to see if you qualify for such a process.  In a 1031 exchange, all of the equity you received from the sale of your property must be used to purchase a new property with a price that is equal to or greater than the net sales price of your original property.  Doing this will enable you to defer capital gains taxes.

It is important to note that there is a timeline in which to execute a 1031 exchange.  As such, speak with a tax professional to discover the qualifications and parameters of this process.

Once your tax concerns are alleviated, investing the money from the sale of your property can be a great way to diversify and grow your money.  Of course, if you engaged in a 1031 exchange, the money from the sale of the property is already invested in a new property.  If, however, you sold your primary residence and qualified for the tax exempt amounts, you have to find someplace to put that money so that it can grow and prosper.

Savings accounts and certificates of deposit (C.D.s) are generally your safest bet.  However, because these investment vehicles are so safe, your returns will not be big.  In fact, many times your returns will not outpace inflation.

If you are interested in real estate, using part of your sales proceeds to buy an investment property may be a great idea.  In addition to monthly cash flow from rental incomes, you build equity in the property by using the tenant’s payments to pay off the mortgage.  Additionally, you can receive numerous tax breaks from investment property.

Finally, depending on your age and goals, putting some of the money into a retirement account or some other stock investment plan may be the way to go.  Besides offering diversification and possible dividends, stock appreciation can help your investment grow.

Regardless of your position, your primary concern after the sale of your property should be your tax consequences.  Once you have resolved that issue, create an investment plan and distribute those sales dollars into one or numerous investments that will cause your money to grow.