How I’ll Spend $2 Million Dollars

After selling my primary residence in California for almost $1 million over asking price, I received over $2 million in cash from the sale. I can’t let that amount of cash just sit around idly; it’s always best to put money to work so it continues to earn more on your behalf. In this blog post, I will share what my plans are for the $2 million. And no. I’m not going to gamble it all away in crypto!

Investing in our family

While making more and more money sounds like a good idea, money isn’t everything. Money is a tool; it does nothing if you only hoard it and never spend it. So money should be spent (some of it, at least) so you can trade it for something you’ll enjoy.

For example, by relocating from Silicon Valley to Dallas, we are majorly upgrading our home. We’ll own a home that’s half (maybe a third) the price and get 2-3x as much! Oh, and it’ll be new and should have significantly less maintenance. Will the home bring us happiness? I certainly think so. By spending money on a home, our family will get to enjoy it for many years to come!

Here’s how a part of the $2 million in home sale proceeds will be spent on the custom home we are building:

1. We owe approximately $100K more for our down payment. We already deposited $100K to the builder.

2. We are planning to build a large pool with lots of fun features and decking in our backyard! It’s currently being designed, so nothing’s final yet. But we are thinking of having a 40’ x 20’ pool with a bench along the length of the pool, a tanning bench for 3-4 people, and an 8’ x 6’ spa that can fit 2 families! We hope to spend about $150K on it, but realistically it’ll likely end up around $175K.

3. Lastly, there are tons of expensive items we need to purchase for the inside of the home, including motorized roller shades, appliances, wall art, decor, furniture, and much more. I’m currently estimating about $125K for all of that, but I wouldn’t be surprised if it surpassed that budget.

So in total, nearly $400K of the $2 million in proceeds will be invested in our family’s dream home!

Uncle Sam

Alright, spending on our dream home was the fun part. But here’s the not-so-fun part of where our home sale proceeds will go: taxes.

To determine how much taxes we owe, I’ll share the home sale math to estimate how much we’ll ultimately owe to Uncle Sam:

• Home sale price: $3.4 million

• Commissions for selling: 4.5% of sale price = $153K

• Home purchase price: $1.8 million

• Home renovations: $235K (write-off)

• Misc expenses/fees: $40K (write-off)

Now, we have the numbers to calculate how much of those proceeds we’ll owe taxes on:

• $3.4 million (sale price) - $1.8 million (purchase price) = $1.6 million

• Then we subtract commissions we paid, home renovation expenses, and misc fees to get $1,172,000.

Fortunately, real estate has so many tax benefits, including the home sale tax exclusion. This rule allows you to exclude up to $250K (single) or $500K (married) on the sale of your primary residence (as long as you’ve lived in it for 2 of the past 5 years). So we won’t pay taxes on $1,172,000. It gets reduced by another $500K, dropping down to $672K.

At the federal level, long-term capital gains offer preferred tax rates. At most, we’ll pay a 20% tax rate on our capital gains. $672K x 20% = $134,400.

California always wants a chunk of your earnings, too. It’s the state with the highest tax rates, unfortunately. I’m estimating we’ll pay a 12% tax rate on the $672K of taxable proceeds. That comes to $80,640.

Adding both federal and California taxes together, we’ll owe Uncle Sam approximately $215K. While we see a $2 million wire to our bank account from the sale of our home, $215K of that goes away due to taxes.

Investments

Of the $2 million in proceeds, $215K will go towards taxes and $400K will go towards our future home. We’ll pay the home sale taxes either as a lump sum immediately or via estimated, quarterly payments. The $400K in home costs, on the other hand, aren’t going to hit us for a few more months. So instead of leaving that money idle in a savings account, we’ll likely invest it in stocks for a couple of months.

If you’re keeping track, we have about $1.385 million remaining to invest. I haven’t fully decided how to allocate the cash towards investments, but here’s what I have in mind:

• 1 flip: $100K

• 2 to 3 rentals: $125K each, including down payment and misc purchase costs, totaling $375K

• The rest into stocks, which would be about $900K. Including investing our future home expenses of $400K, I’ll invest about $1.3 million in stocks in the short-term.

In my (limited) experience flipping homes, flips usually come when they come. If and when an opportunity lands in front of me, I will be ready for it with $100K in hand.

For rentals, I have already been on the hunt for a few local properties in the Dallas metro. I am optimistic I will invest in at least 2 rentals this year and hoping for more!

Stocks will be interesting to invest in. The market has been down in January, but at the time of writing, they’ve recovered about 5-6% since their low point. There’s still about 5-6% more to go to return to all-time highs, so I still see an attractive entry point into the market. As they say, prioritize time in the market over timing the market. You can’t predict if it’ll go up or down tomorrow, so keep investing consistently over time.

That said, I will likely lump sum several hundred thousand into ETFs and dollar-cost average the rest over the coming months.

Takeaways

Seeing an incoming wire of $2 million is absolutely mind-blowing! It’s important to have a plan before receiving such a large amount of cash, since you don’t want that kind of money just sitting around earning nothing.

We’ll be investing the vast majority of it in real estate and stocks, but we’ll liquidate around $400K from stocks to put into our custom home once it’s ready several months from now. The majority of the real estate investments will be invested in rental properties, which I’m excited about since we haven’t purchased one in several years.

Investing in the stock market this year will be interesting, given the large market correction at the beginning of the year, coupled with high inflation. Nevertheless, as a long-term investor, I consider any short-term dips to be buying opportunities, so I will be lump-summing a good chunk of the proceeds into stocks and dollar-cost averaging (DCA) the rest over several months.

If you received $2 million today, how would you invest it? Share below!