Investors with considerable tax gains in their portfolios as well as real estate investors should be aware of some of the tax planning strategies described below. Please refer to our Tax Planning page for more information about the services we provide. Many other strategies could also be beneficial depending on your personal situation.
Capital Gains Strategies
One of the most common reasons for tax planning is to manage and minimize capital gains taxes. Here are some of the strategies:
- Managing capital gains and distributions – the strategy involves a disciplined approach to allowing gains to become long-term wherever possible to reduce tax rates; allowing dividend reinvestments; using tax-efficient vehicles like ETFs and model portfolios over mutual funds; and moving tax inefficient structures into tax-deferred accounts where possible.
- Tax Loss Harvesting – the strategy to offset capital gains with capital losses. While it’s often built into broker software these days, the key is to look at the overall financial picture across all the taxable accounts. This way, the process would be more tax-efficient, determine whether it even makes sense in a given year, and avoid pitfalls such as wash sale rule.
- Opportunity Zones – a designation and investment program created by the Tax Cuts and Jobs Act of 2017. Almost any capital gain is eligible (not dividends) to be rolled into OZ within 180 days after realizing gain. 3 Tax Advantages include:
- Capital Gains Deferral – until you sell or 12/31/2026
- Step-Up Basis for Capital Gains – hold for 5 years and get a 10% tax reduction on gains
- Capital Gains Exclusion – hold for 10 years and any gain in OZ investments is tax-free
- Note: most states conform with federal law, but there are exceptions (e.g., NY, CA)
- More information on QOZ is available.
Some advanced investment tax strategies also include:
- Covered Call Options Strategy – Using client’s stock positions to generate immediate income through the use of options.
- Syndicated Conservation Easement Transaction – allows a pool of investors to form a venture to acquire land from a promoter that is then donated to a qualified charitable organization, usually legitimate land trusts, for the purpose of conserving the property for certain enumerated altruistic and charitable purposes, such as for outdoor recreational use by the general public or protecting wildlife or preserving historic structures.
- Intangible drilling cost (IDC) – significant tax benefit for oil companies; also includes passive activity exception, depreciation, and depletion allowance.
Real Estate Strategies
Real estate investments come with their own tax challenges of ownership, income and selling. Here are some of the strategies that may help cut your tax bill.
- 1031 Exchange – allows an investor to defer the payment of capital gains taxes that may arise from the sale of real property by using proceeds to purchase “like-kind” real estate.
- Value of new “replacement” property must be greater than the value of sold one.
- Must invest at least all of the equity proceeds from the sale of the relinquished property into the replacement property. Any uninvested equity is called “boot” and will be subject to capital gains tax.
- Debt on the replacement property must be greater than or equal to the debt on the relinquished property.
- A Qualified Intermediary (QI) is required.
- Delaware Statutory Trust (DST) – passive investment vehicle that allows multiple investors to own fractional interests in a single property or portfolio of properties.
- 721 Exchange – allows for tax-free transfers of income-producing real property to a real estate investment trust’s (REIT’s) operating partnership in exchange for ownership interest in the partnership.
- Investor contributes property to REIT’s operating partnership in exchange for units in operating partnership.
- No gain or loss is recognized to a partnership or any of its partners for the contribution.
- Investor converts to passive ownership and defers tax liability.
- Partnership interests are then redeemed for REIT shares or cash – either is a taxable event.
- REIT shares can be liquidated by investors via the REIT’s redemption plan.
- Cost Segregation – Realization that building includes parts such as machinery, equipment, wiring, roofing, flooring, etc., that have much shorter useful life. Instead of using straight line depreciation over useful life (e.g., 39 years – Commercial Buildings, 27.5 years – Residential Buildings), the strategy break out the above components and can typically depreciate 25%-60% of a given building in 1-5 years.
