What To Do With Home Sale Proceeds

Jennifer Park
Published: September 15, 2022 | Updated: April 18, 2024

Selling your home at a profit is a financially rewarding experience. However, knowing what to do with home sale proceeds can be difficult. There are several options to consider: you can invest the money from the sale of your home, use the money to pay down debt, or purchase another property. In this article, we’ll consider the impacts of each alternative.

What To Do With Home Sale Proceeds

What Happens When You Sell Your House for a Profit?

If you’ve recently sold your home for a profit, congratulations! You’ve got some extra money that you can use to your advantage.

However, it’s essential to determine how much of the money you receive is clear from other expenses related to the sale and if you’ll owe home sale proceeds tax.

Typical costs associated with a house sale include real estate agent commissions, title fees, escrow fees, and prorated property taxes. You’ll want to ensure that you fully pay all costs associated with selling your house. The net proceeds from home sales are subject to capital gains taxes in certain conditions.

Exclusion from Capital Gains Taxes

To qualify for an exemption from capital gains taxes, you must meet the ownership and use tests. Under the ownership and use test, the home must have been your primary residence for at least two of the prior five years before the sale.

If you meet the ownership and use tests, you can exclude up to $250,000 in capital gains as a single tax filer or $500,000 as a married filing jointly couple. Thus, if your gain is lower than the capital gain exclusion limits, it may be entirely tax-free. If your net proceeds from the sale exceed the exclusion limits, the remaining amount will be subject to capital gains taxes based on your appropriate tax rate.

If you have sold another primary residence in the past two years, you may be ineligible for the capital gains exemption.

What if I Am a Seller Financer Who Sells a Balloon Note on a Mortgage?

Sometimes, owners choose to offer their buyers private seller financing with a balloon note at the end of the mortgage. Offering seller financing to buyers is advantageous to home buyers and sellers in certain situations. For instance, a seller can offer buyers customizable payment terms and charge a higher interest rate than a conventional mortgage note. If the seller doesn’t want to assume the risk of the financing and needs access to their funds before the buyer pays off the mortgage, they can sell the note to a mortgage buyer.

Home buyers benefit from seller financing since they typically make lower interest-only payments for a certain period. If they cannot meet the balloon payment when it comes due, they can attempt to refinance the loan or find another property that meets their needs.

use proceeds from home sale

How Can I Best Use the Net Proceeds From a Home Sale?

Deciding the appropriate way to use your gains from a home sale depends on your financial goals. Some people use proceeds from the sale for paying down debt or investing in the stock market, while others use the money as a down payment on a new property. Here are a few options to consider when deciding what to do with house sale proceeds.

Paying Down Debt

You may have debts that you’re tired of paying. Credit cards, student loans, auto loans, and other obligations can take a sizeable chunk of your monthly income. Using your home sale proceeds to pay off debt can release you from regular monthly payments to your creditors. You can use the additional money towards saving for retirement, investments, or personal interests, like travel.

Down Payment for a New Home

Many people use the gain on the sale of their home as a down payment on a new house. Those seeking to move to a new area, a house with more living space, or other attributes that their current primary residence doesn’t have can easily use the proceeds to purchase another place that fits their needs.

If you don’t have a use for another home, you can use the proceeds as a down payment on a rental property. Rental properties provide an opportunity for investment and a regular income stream. You can purchase a property you believe provides the best chances for a return on your investment and put it on the rental market.

If the net proceeds from your home sale are significant, you may consider purchasing several rental properties.

Invest in the Stock Market

Sometimes, people choose to invest their proceeds in stocks, money market funds, or other liquid investments. Investing in the stock market provides opportunities to achieve a rate of return that may be higher than that you would obtain by purchasing another property.

For instance, if you invest a $100K gain from selling your property in a diversified stock portfolio with an annual average return of 8%, you’ll net $8K in profits your first year. If you keep your money invested for ten years and receive the same annual 8% return, your portfolio will have a value of $215,892.50 at the end of ten years — nearly a $116K gain.

Of course, there is some risk to investing in the stock market. Market dips aren’t uncommon, and you can’t guarantee the same rate of return each year. However, if you stay on top of your investments and make adjustments when necessary, you can potentially obtain significant returns.

Purchasing Long-term Care Insurance

If you’re at a stage in life where future healthcare needs are a concern, using some of your house sale proceeds to purchase long-term care insurance could be a prudent decision. Long-term care insurance helps cover the cost of care that is not typically covered by health insurance, Medicare, or Medicaid, such as assistance with daily living activities or home care services. This can protect your other assets and savings in the long run, providing peace of mind.

Buying Permanent Life Insurance

Buying permanent life insurance with some of the money from your house sale can offer dual benefits: financial security for your dependents and a potential cash value that grows over time. Permanent life insurance, unlike term insurance, provides coverage for your entire life and can be a part of your estate planning strategy. This is particularly useful if you’re thinking about how to secure your family’s financial future after selling your property.

Supplementing Your Retirement with Annuities

For those considering how to bolster their retirement savings, investing in annuities can be a solid strategy. Annuities provide a steady income stream, which can be a reliable supplement to other retirement incomes like Social Security or pension plans. This option can be especially attractive if you’re looking for stable, predictable financial support during your retirement years.

Savings Options After the Sale of a House

After selling a house, you have several savings options to consider for managing the proceeds effectively:

  • High-yield Savings Accounts: Ideal for keeping funds accessible while earning higher interest rates than regular savings accounts. Useful if you’re planning a near-term purchase or need liquidity.
  • Certificates of Deposit (CDs): CDs offer slightly higher interest rates for locking in your money for a predetermined period, such as six months, one year, or longer. This is a safe choice if you won’t need immediate access to your funds.
  • Money Market Accounts: These accounts typically offer higher interest rates than traditional savings accounts and come with check-writing privileges. They are suitable for those who want a mix of accessibility and earning potential.
  • Treasury Securities: Investing in government bonds like T-bills, T-notes, or T-bonds can provide a safe investment avenue with guaranteed returns backed by the U.S. government.
  • Brokerage Accounts: For those looking to potentially grow their proceeds over the long term, investing in stocks, bonds, mutual funds, or ETFs through a brokerage account can be a good option. This approach requires more knowledge and comfort with market risks.

Why Should Retirees Invest Home Sale Proceeds?

When retirees sell their home, the proceeds from the sale present a significant opportunity to enhance their retirement lifestyle and financial security. Investing these proceeds is a wise option for several compelling reasons:

  • Extending Retirement Savings: The additional funds can help extend the lifespan of other retirement savings. Many retirees rely on fixed incomes from pensions, Social Security, or retirement accounts, which may not adequately cover all their daily expenses or unexpected costs. By investing the proceeds from a home sale, retirees can generate additional income, ensuring that their retirement savings are sufficient to cover extensive needs, including healthcare and leisure activities.
  • Hedging Against Inflation: Investing home sale proceeds can serve as a hedge against inflation. As the cost of living tends to increase over time, money kept in a savings account may lose value due to inflation. Investing in options that potentially offer returns that outpace inflation helps preserve the purchasing power of their money, which is crucial for maintaining a stable and comfortable lifestyle when income might be fixed or decreasing.
  • Achieving Financial Goals: The proceeds can help retirees meet specific financial goals, such as leaving a legacy for heirs or contributing to charitable causes. Strategic management of the lump sum from a home sale can enable planning for estate distributions, donations, or setting up educational funds for grandchildren, ensuring that their wealth continues to benefit loved ones or favored causes.

Should I Sell My House and Invest the Money?

Deciding whether to sell your house and invest the money is a question of your financial goals. If you need your residence to live in, selling it won’t make much sense unless you have another place to stay.

However, individuals seeking to downsize their living arrangements or who have another place to reside may be wise to sell their homes and invest the money. If the value of your home has significantly increased, you may be able to realize a sizeable gain you can use towards other investment opportunities.

Before deciding to sell your home and invest the money, it’s wise to speak with a personal finance or wealth management advisor. An advisor can help you determine the net proceeds you may receive from your home sale and review your potential options. If you decide to put your money in the stock market, they can help you set up an investment portfolio that suits your risk tolerance and returns expectations.

If you’d prefer to use your gains towards purchasing a new home, a real estate professional can help you find a home with a sale price and options that meet your buying criteria. A real estate professional can also connect you with lenders who offer mortgage rates in line with your loan criteria.

How Long To Reinvest Proceeds From Home Sales?

Determining how long to keep your proceeds from your home sale in a new investment depends on your personal financial goals. Some may keep their money invested for years until they are ready to retire. Others seek to make a specific return on their investment before selling it and using the money for other purposes. If you’re unsure how long to keep your cash reinvested in new opportunities, seek the assistance of a financial advisor to determine an appropriate time length for your investment.

How to Optimize Returns from Home Sale Proceeds

Optimizing returns from home sale proceeds involves a few strategic steps to ensure the balance of risk and growth:

  • Assess Your Financial Situation: Evaluate your immediate cash needs, long-term income requirements, and risk tolerance. This helps in choosing appropriate investments.
  • Diversify Your Investments: Spread your investments across different asset classes such as stocks, bonds, real estate, and possibly alternative investments like private equity. Diversification helps mitigate risk while capitalizing on growth opportunities in various sectors.
  • Consider Tax Implications: Invest in tax-efficient vehicles like municipal bonds for tax-free income, and plan for potential capital gains taxes. This can maximize your take-home returns.
  • Consult a Financial Advisor: A professional can offer customized advice and insights, helping you to structure a portfolio that aligns with your financial goals and market conditions.

The Takeaway

Deciding what to do with the proceeds from a home sale is something you should carefully deliberate. Your decision-making process is a bit easier if you need the money for a down payment on another home. However, if you don’t need the money to buy a new house, you can use it to pay off debt, purchase an investment rental property, or set up an investment portfolio. Whatever you choose, make sure your decision aligns with your personal goals.