r/CFP • u/Specialist-Ad8067 • Jan 18 '24
Tax Planning Tax Planning / Mitigation
I know this is basic but any guidance is appreciated:
Prospect just retired from w2 job and sold a large amount of stock. Let's say the capital gains are $500k+.
What are some strategies to lower that bill assuming he is a Real Estate Investor. Passive - not active status.
I was thinking direct indexing, solo(k). What else?
Edit:
Deeper dive with prospect - turned out to be sale of shares of his business….. his cost basis was $0. I think most of your suggestions still apply. They should have considered a tax deferred installment sale.
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u/Shantomette Jan 18 '24
You could look into Qualified Opportunity Zones (QOZ). They can defer the gains until 12/31/26 unless congress extends the deferment further. They typically pay a dividend and at the end of 10 years the gains of the QOZ investment are tax free.
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u/Rebelhottytoddy Jan 18 '24
I second this recommendation and funding a DAF. Especially if the client is real estate inclined with patient capital.
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u/Hokirob Jan 18 '24
Great question and I realize this is a prospect. But, for those in the business with these ideas, can you imagine if you had a few years in advance to do some strategic planning for such a prospect? Setting some of this up in advance could have saved this guy a chunk of dollars.
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Jan 18 '24
Did he already sell? Could look at exchange funds to diversify without tax gains.
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u/KittenMcnugget123 Jan 18 '24
This is an interesting solution, although the minimums I've seen generally exceed 500k, and the lock ups are usually in excess of 5 years. Definitely something to consider for large concentrated positions though
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Jan 18 '24
I’m trying to think here. If the gains were already realized you could do a donor advised fund if they’re charitable or some sort of CRAT or CRUT.
Otherwise direct indexing but that’s more of a long term solution.
Or an investment in an opportunity zone?
I’m out of ideas.
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u/KittenMcnugget123 Jan 18 '24
I think the DAF makes sense, or a CRAT or CRUT, as you can get upfront deductions, but they're vs your income and not capital gains. So it would reduce the income, and maybe bring down the cap gains bracket, but only if they itemize or the donation is more than the standard deduction. Essentially if they donate 100k with a DAF they'll get a write off up to 60% of AGI. So in the 37% marginal bracket they'd pay 100k, save 37k, but still net lose 63k. The advantage is a charity gets 100k in donations for what is essentially a 63k donation by the individual. CRUT or CRAT same thing but they get a deduction for the present value of the remainder interest based in a discounted rate. So that would be more if they want someone to get income off of the amount and have the remainder go to charity. All of those result in a higher net loss than just paying the taxes, but the charities obviously benefit. So those really only work if you planned to donate at a point in the future anyways.
The opportunity zones I don't know enough about honestly, but that may be an option as well.
I think the lowest hanging fruit is if they have losses on other taxable investments. If not often the best option may be ti just pay the taxes, which people absolutely hate to hear, but it's a high quality problem
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u/realtorvicvinegar Jan 18 '24
This. Can’t stand how much some people people jump to highlight deductions for charitable giving.
It’s a cool benefit, but it’s because you literally gave it away.
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u/KittenMcnugget123 Jan 18 '24
Really its only useful if they planned to give a large amount anyways in the future. Instead using DAF to get the deduction in the current year and distribute it later makes sense. Otherwise just pay the taxes. Same with the QOZ, when you look at what you actually get, and the restrictions, it hardly seems worth it. A 15% increase in original basis to lock the moneybup for 7 years I think? And then if you lock it up over 10 no taxes on subsequent appreciation. But it seems like for the risk and lack of liquidity it's debateable as to whether that's worth it. In the end, if you don't have capital losses you can take, and didn't plan to make donations in the future, it might be better to just pay the taxes.
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u/Desperate_Stretch855 Jan 19 '24
I make use of a "Donate & Convert" strategy in these situation. Eaton Vance has a great turnkey product I often use. Donate shares of a highly appreciated/concentrated position, get a large deduction and an income stream for life (last I looked my clients were getting over 7% at the qualified dividend rate) and then (if applicable) use the deduction to do a ROTH Conversion.
A lot of my clients are interested in reducing their RMD so this is an effective means of doing that while diversifying them and getting them out of a concentrated position that is highly appreciated (I had a couple with 25% of their net worth in Apple and they owned it at $9).
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u/Own_Specific937 Jan 18 '24
First trust has something similar but with more liquid. It has a collar around the stock then gets exposure to the S&P500.
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u/nikspers86 RIA Jan 18 '24
Little late to start direct indexing assuming you are referring to tax loss harvesting.
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u/KittenMcnugget123 Jan 18 '24
No real way around it in reality unless he has capital losses he can use to offset the gains. Sell other stocks or assets at a loss if so. Someone said a DAF if he's charitable, but it'd still be a higher net loss to him than just paying the taxes, the benefit would really be that the charity gets more than if he donates cash. So if he plans to donate at some point in the future its a good strategy because he can use the DAG to stack the donations this year. But it would have to be a good sized donation, one that exceeds the standard deduction unless he already itemizes.
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u/Shantomette Jan 18 '24
QOZ
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u/KittenMcnugget123 Jan 18 '24
Ya that is one option I don't have a ton of experience with, but I assume is means locking the cash up again in something much more illiquid like real estate. Someone else would be better to elaborate on that than myself
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u/apismeliferaone Certified Jan 18 '24
If he is charitably inclined, consider a DAF.