Legal Definitions - locked in

The term "locked in" has two primary meanings in a legal and financial context:

• 1. Unable to Sell Due to Tax Implications

  This refers to a situation where an individual or entity holds an asset, such as stocks or real estate, that has significantly increased in value. They are "locked in" because selling the asset would trigger a substantial tax liability on the profit (known as capital gains tax), making them reluctant or unable to realize their gain by selling.

  • Example 1: Sarah inherited a portfolio of blue-chip stocks from her grandmother many years ago. The value of these stocks has quadrupled since then. While Sarah might consider selling some shares to fund a new business venture, her financial advisor explained that doing so would result in a very large capital gains tax bill. Consequently, Sarah feels locked in to holding the stocks, even though she could use the cash.

    Explanation: Sarah is "locked in" because the significant tax burden associated with selling her appreciated stocks prevents her from liquidating them, despite potentially wanting to use the funds for other purposes.

  • Example 2: A small business owner purchased a commercial property for their operations fifteen years ago. The property's market value has since increased dramatically due to urban development in the area. The owner is now considering relocating to a larger facility but realizes that selling their current property would incur a substantial capital gains tax, reducing the funds available for their new purchase. They feel locked in to their current location for the time being.

    Explanation: The business owner is "locked in" to their property because the high capital gains tax liability on its sale makes moving financially less attractive, despite the desire for a larger space.

• 2. Guaranteed for a Set Period

  This meaning indicates that a specific price, rate, or condition has been fixed and will remain unchanged for a predetermined duration, providing certainty against market fluctuations.

  • Example 1: When David applied for a home loan, his bank offered him an interest rate of 6.25%. The bank agreed to "lock in" this rate for 45 days, giving David ample time to complete the closing process without worrying that the interest rate might increase before he finalized his mortgage.

    Explanation: The 6.25% interest rate is "locked in" because the bank guaranteed it would not change for a specific period (45 days), protecting David from potential rate hikes during that time.

  • Example 2: A restaurant owner is negotiating a contract with a food supplier. The supplier offers a specific price for bulk ingredients, stating that this price is "locked in" for the next six months. This allows the restaurant to budget accurately without concern for sudden increases in ingredient costs.

    Explanation: The ingredient price is "locked in" as it is guaranteed to remain constant for the agreed-upon six-month period, providing stability for the restaurant's expenses.

  • Example 3: Before starting a major home renovation, a homeowner received a detailed quote from a construction company. The company specified that the total project cost, including materials and labor, was "locked in" for 90 days. This ensured that even if material prices rose slightly in the market, the homeowner's agreed-upon cost would not change.

    Explanation: The project cost is "locked in" because the contractor committed to that price for 90 days, shielding the homeowner from potential cost increases during that timeframe.