Home Seller to Millionaire: Tips for When You Sell and Become an Instant Millionaire
Written by
Yaël Bizouati-Kennedy
Edited by
Rebekah Evans
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If you just sold your house for more than $1 million — consider yourself very lucky, especially in the current housing market. Indeed, home sales are continuing to be tepid due to a confluence of factors, such as soaring mortgage rates, high prices and lack of inventory. While in February, sales bounced 9.5% from January, year-over-year, sales slid 3.3%, according to the National Association of Realtors.
What’s more, the median existing home price in February was $384,500, a 5.7% increase from the prior year — but a far cry from the million-dollar mark.
So, if you’re one of these lucky sellers and you find yourself an instant millionaire, take a minute to celebrate, but then you should also quickly plan what to do with your newfound windfall, experts said.
“Even a seven-figure windfall can disappear if the wrong steps are taken,” said Peter C. Earle, senior economist at the American Institute for Economic Research.
As he explained, the sale of a house constitutes the sale of a major asset, perhaps the largest asset one will ever own, so consulting a financial adviser is key.
“Very generally speaking, tax considerations, estate planning and retirement savings are among the first and most crucial aspects of managing a significant capital gains event,” Earle said.
Understand and Plan Your Taxes
“First things first — when you make money off selling your home, you need to understand what your tax implications are,” said Erika Kullberg, attorney, personal finance expert and founder of Erika.com.
For instance, you should quickly determine whether you will owe capital gains once tax season rolls around, and if you aren’t sure, consult with a tax advisor.
“The last thing you want to do is invest that money or spend it and then not be able to pay your tax bill,” Kullberg said. “If you make seven figures selling your house, there’s a good chance you will owe a hefty amount of taxes.”
Review Your Financial Plan
Melissa Murphy Pavone, certified financial planner (CFP), certified divorce financial analyst (CDFA) and director of investments at Oppenheimer & Co. argued that when a client sells their house and has a large liquidity event, the first thing she suggests is to review their financial plan.
“In the meantime, I would suggest a high-yield savings account (HYSA) at their local bank,” she said, noting that these typically provide flexibility and liquidity, allowing easy access to funds while still earning a competitive rate of return.
“I suggest reinvesting your dividends. You will soon start to see the power of compound interest. Your money will start to make you money,” she said.
Assemble a Team of Professionals
Murphy Pavone added that another crucial step in the case of the sale of a home is to assemble a team of professionals to help navigate the complexities of the process successfully.
“Take a deep dive with your CFP in order to [receive] personalized guidance,” she said, adding that you will also need a CPA. “Together the team of professionals will address not only the financial considerations and tax implications, but ultimately optimize the outcome for the client’s financial future.”
Boost Your Savings and Pay Off Debt
First, if you don’t already have a nest egg or emergency fund, now would be an opportune time to start saving, said Ben McLaughlin, savings expert and president of Raisin.
“Putting aside six months’ worth of expenses in a HYSA is a smart option. Your newfound cash will still be easily accessible while earning you interest,” he said, stressing the importance of not leaving your newfound windfall to languish in a checking account.
And if you don’t need your funds immediately, consider locking in a higher interest cash product such as a high-yield CD, where you can guarantee earning a certain percentage over time, he said.
Kullberg also noted that paying off student loans or consumer debt and maxing out your retirement accounts are never bad ideas.
Don’t Fall Prey to Lifestyle Creep
One of the biggest hindering factors for retirement goals and financial well-being, in general, is lifestyle inflation — when your expenses increase as your income grows. Otherwise known as lifestyle creep, this can quickly derail any financial plans.
Indeed, according to Earle, this is one major pitfall of receiving a large windfall from the sale of a house.
“Many individuals quickly exhaust their newfound wealth on extravagant purchases or lifestyle upgrades,” he said. “A detailed budget and financial plan that prioritizes tax strategies, beefing up savings and long-term investments help ensure enduring outcomes.”
Along the same lines, the second potential pitfall is squandering what remains on consumer goods that provide zero return on investment.
“A million dollars is not what it once was and can quickly disappear. It’s like winning the lottery,” said Marisa Simonetti, founder of Simonetti Real Estate Team. “Long lost ‘friends’ and relatives come out of the woodwork magically needing something. Without a plan, a person could fall victim to the same fate as lottery winners, being worse off than when they began.”
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