How to fund 10% earnest money deposit for new construction while waiting on home sale

We're planning to have my elderly mother move in with us next year, and we need more space. We've decided to sell our current house and build a new home nearby. The issue is that the builder in the neighborhood we like requires 10% down at contract signing, which will be around $75,000-$80,000. Our original plan was to put 20-25% down at closing, with most coming from equity in our current home. We were comfortable with 3-4% at contract signing, but 10% is more than we have readily available. Construction will take about 12 months, so we'd need this money upfront while waiting for our current home to sell. We're considering two options: selling stocks or getting a home equity loan on our current house. I'm worried that if we sell $80K in stocks, we'll get hit hard with taxes. Would that be treated as earned income? A home equity loan seems like it might be cheaper since we'd only need it for 10-12 months until we sell our house. But I'm not sure about current rates. Are there any other options we should consider? We both have strong income and excellent credit scores.

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21 comments

Beatrice Marshall

•8M

The good news is selling stocks won't be treated as earned income - it would be capital gains, which are typically taxed at a lower rate than ordinary income. The tax impact depends on how long you've held the stocks and your current tax bracket. If you've held the stocks for more than a year, you'll pay long-term capital gains tax (0%, 15%, or 20% depending on your income). If held less than a year, it's short-term capital gains taxed at your ordinary income rate. You'll only pay taxes on the profit (current value minus what you paid), not the entire $80K. A home equity line of credit (HELOC) could be a good option too. Current rates are around 6-8%, but since you'd only need it for about a year, the total interest cost might be less than your capital gains tax. Plus, the interest might be tax-deductible if used for home improvement. Another option to consider is a 401(k) loan if either of you has enough in retirement accounts. You can typically borrow up to $50,000 or 50% of your vested balance. You pay interest to yourself, and there's no tax hit as long as you repay according to terms.

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Beatrice Marshall

•8M

Long-term capital gains would be taxed at 15% in your tax bracket, which is better than your ordinary income rate of 24%. That's definitely more favorable than I initially thought. Bridge loans are specifically designed for your situation, but they typically come with higher interest rates than HELOCs – often 1-3% higher – plus origination fees. They're convenient but usually more expensive. Yes, you can take loans from multiple 401(k) accounts. Each 401(k) has its own limit (usually $50,000 or 50% of your vested balance, whichever is less), so together you might be able to borrow the full amount needed. The main downside is that if either of you left your employer before repaying, you might need to repay the full amount quickly or face taxes and penalties.

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Melina Haruko

•8M

After reading about your situation, I wanted to share my experience using taxr.ai when I was in a similar position last year. I was also selling my home and building new, and needed to figure out the most tax-efficient way to come up with earnest money. I was confused about the tax implications of various options (selling investments, using retirement funds, etc.) and getting conflicting advice online. I uploaded my financial documents to https://taxr.ai and got a clear analysis of each option based on my specific situation. Their system analyzed my investment statements and showed exactly what my tax bill would be if I sold various assets. They showed me that in my case, selling certain investments would actually trigger much less tax than I feared, while other funding options had hidden costs I hadn't considered. The peace of mind from having actual numbers instead of guesswork was totally worth it.

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Melina Haruko

•8M

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Melina Haruko

•8M

The service uses AI to analyze your documents, but they have tax professionals who review complex cases. They use the same security standards as banks, which gave me comfort about uploading documents. For capital gains calculations, they were surprisingly detailed. They identified different lots of stock I had purchased over time and showed tax implications of selling specific lots versus others. They even showed how selling certain combinations would impact my AGI and other tax situations. It was much more sophisticated than the basic calculations I was trying to do myself.

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Reina Salazar

•8M

I was in your exact situation last year and used taxr.ai after seeing it recommended here. I was skeptical at first because I thought I understood capital gains tax well enough, but I decided to try it anyway since we were talking about a significant amount of money. I'm so glad I did! The analysis showed me that selling a specific combination of stocks would result in about $7,000 less in taxes than my original plan. They identified some older investments with higher cost basis that I had forgotten about. The report also showed exactly how the sale would affect my overall tax situation for the year, including impacts on some tax credits we normally qualify for. The most helpful part was that they provided a clear comparison of all options (HELOC, stock sales, 401k loan) with actual numbers for my situation rather than just general advice. Made the decision so much easier when I could see the real costs of each option.

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Saanvi Krishnaswami

•8M

Have you considered just calling the IRS to discuss the tax implications? I had a somewhat similar situation last year and spent WEEKS trying to get through to someone at the IRS. Always on hold for hours, then disconnected. Super frustrating! Finally found this service called Claimyr that got me through to a real person at the IRS in about 15 minutes. You can check them out at https://claimyr.com - they basically hold your place in the phone queue and call you when an agent is about to answer. They even have a demo video showing how it works: https://youtu.be/_kiP6q8DX5c I was able to get official guidance on my specific tax situation regarding liquidating assets for a home purchase. The IRS agent walked me through exactly how to minimize the tax impact based on my specific holdings. Honestly better advice than what my financial advisor gave me!

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Saanvi Krishnaswami

•8M

It's not about getting you through faster than others in the queue - they use an automated system that dials repeatedly and navigates the phone tree until they get in the queue. Then their system holds your place in line while you do other things. They don't charge you to wait on hold - they call you back when an actual human at the IRS is about to get on the line. I was cooking dinner when I got the call that an agent was ready to talk to me. The system navigates all those annoying prompts and holds for you. It's basically outsourcing the frustrating part of calling the IRS.

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Mason Lopez

•8M

Alright I need to eat my words about Claimyr. After my skeptical comment, I decided to try it for myself since I've been needing to talk to someone at the IRS about some stock sales and capital gains questions. I've been trying to call the IRS directly for THREE WEEKS with no luck. Used Claimyr yesterday and got connected to an IRS agent in about 45 minutes. I was able to work on other things until my phone rang saying an agent was ready. The IRS agent I spoke with was super helpful about my questions on minimizing capital gains impact when selling stocks. She explained some strategies for identifying specific shares to sell that could reduce my tax burden. Totally worth it just to save me from the hold music hell. For the original poster, definitely consider calling the IRS directly using this service to get official guidance on your specific situation. The tax implications of different funding sources can vary significantly based on your personal circumstances.

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Vera Visnjic

•8M

Another option to consider is a pledged asset line of credit. If you have a brokerage account, you can often borrow against your investments without selling them. Rates are usually pretty competitive (often lower than HELOCs), and you don't trigger any capital gains since you're not selling. I used this approach when building our home last year. My brokerage offered a rate around 5.5% which was better than the HELOC rates at the time. The main risk is if your investments drop significantly in value, you might face a margin call, but if you borrow conservatively this is unlikely.

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Vera Visnjic

•8M

Both Fidelity and Vanguard offer these products. Fidelity calls it a "Pledged Asset Line" while Vanguard calls it "Pledged Asset Account." The rates are typically based on the Fed funds rate plus a margin based on how much you're borrowing. The main risks beyond margin calls are: 1) interest rates can fluctuate since these are typically variable rate loans, 2) if you don't make interest payments, they'll be added to your loan balance which could eventually trigger a margin call, and 3) psychologically it's easy to forget it's a real loan since there's no formal monthly payment requirement. One benefit I didn't mention is that unlike a 401(k) loan, you don't have to sell your investments, so you remain in the market and don't miss potential growth during your borrowing period. This was significant for me as the market went up about 15% during the period I had my loan.

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Jake Sinclair

•8M

You're right about the limits and potential fees. I should have clarified that we did this by taking advantage of balance transfer offers, not directly paying the builder with cards. We transferred the balance to our checking account (many cards offer this option during promotional periods) then paid the builder from there. The limits issue is valid though - we needed less than $30k and split it across two cards. For $80k you'd need multiple high-limit cards which might be unrealistic for most people. And yes, always check if there are balance transfer fees (some promos waive these too).

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Teresa Boyd

•4M

I'm facing a similar situation and have been researching this extensively. One thing I haven't seen mentioned yet is the timing of when you sell your stocks. If you're close to crossing into a new tax year, you might want to consider splitting the stock sale across two years to potentially stay in lower capital gains brackets. Also, make sure to check if your state has additional capital gains taxes. Some states like California tax capital gains as ordinary income, which could significantly impact your decision between selling stocks vs. taking a loan. Have you calculated the actual after-tax cost of each option? For the stock sale, don't forget to factor in any state taxes plus the federal 15% long-term capital gains. For loans, remember that interest payments aren't tax-deductible unless it's a true mortgage (HELOC interest deductibility rules changed a few years ago and now depend on how you use the funds). The pledged asset line mentioned above is probably your best bet if your brokerage offers competitive rates. You keep your market exposure and avoid the tax hit entirely.

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