How to Exercise Stock Options to Pay the Down Payment on a House
Buying a house with proceeds from exercising stock options is often a good move. By bringing in the extra cash from a stock option exercise to escrow, monthly mortgage payments can be substantially lowered. A deposit funded from a stock option exercise also avoids depleting cash reserves. The tax consequences, however, can be severe, especially if estimated tax payments have not been made. With some tax planning, it is possible to have a smooth stock option exercise for a down payment without any tax surprises next April 15.
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Instructions
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Contact the human resources department to find out how many shares in the stock option are currently vested, and get instructions for how to exercise. It is sometimes possible to exercise non-vested shares, but they cannot be withdrawn until they vest, so non-vested shares will not help with an upcoming down payment on a house.
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Contact a tax adviser to calculate the tax liability from the exercise of stock options. Make sure the tax adviser calculates under both the regular tax system and the alternative minimum tax system (AMT). The higher tax from both systems is the estimated tax liability from a stock option exercise.
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Using the tax information from the previous step, exercise and sell a sufficient amount of shares in the stock option to cover both the tax liability and the down payment of the house.
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Once the trade settles, request a check for the proceeds.
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Send an estimated tax payment to the IRS for taxes owed from the stock option exercise by the estimated tax payment due date.
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Send the remainder of the proceeds to the escrow company as a down payment for the house.
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Tips & Warnings
Contact a tax adviser or an IRS representative for more details on the tax consequences of a stock option exercise.
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