What am I allowed to do with proceeds of a house sale?[ Edited ]
I just sold my home and am planning to build a smaller home next year. I put the equity into my savings account which earns very little. I have a USAA credit card with a $12,000 balance which charges 10% interest. Can I pay off the credit card from my equity or will there be some type of penalty for using it for something other than the new house? I will be able to replace it by the time I build.
I have great news for you – I think!
Assuming the house you sold was your residence not an investment property sold as part of planned Section 1031 exchange (don’t worry – if you don’t know what this means, you’re probably good), then you’re basically free do whatever you want with the money. Should you use some of it to pay off a $12,000 credit card with a 10% interest rate? That sounds like a great idea to me!
The one potential drawback with your home sale transaction is that you might have to pay taxes on any gain you recognized. Having said that, it’s also possible that taxes might not even be an issue. IRS Publication 523 outlines the income tax implications of the sale of a primary residence. Under the heading of “Excluding the Gain,” you’ll see that you may actually be able to exclude from your taxes up to $250,000 of the gain ($500,000 if married filing jointly). To qualify, you have to meet certain ownership and use tests and you can’t have excluded the gain on the sale of another home in the 2 years prior to the sale of this one. Bottom line: Assuming you meet the criteria, you won’t have to pay any tax on your gain and you’ll be free to use all of the profits any way you choose. I encourage you to contact a CPA or other qualified tax preparer to discuss your specific situation just to be sure though.
Finally, my only other thought here is to offer some words of caution regarding the credit card debt you’ll be paying off. Specifically, I urge you to do whatever you can to make sure make sure you don’t put yourself back in this situation again in the future. Build and follow a spending plan that keeps you spending less than you earn and also allows you to maintain an emergency fund of 3-6 months worth of your committed expenses. This way, when the unexpected happens, you won’t have to go into debt to pay for it.
Thanks so much for your question and best of luck to you!