Posted 7 months ago

What to do with Capital Gains?

Welcome to the world of quality problems. You’ve made an investment that has done well and now you’ve decided to realize those gains. However, you’re not the only party who’s benefited. Uncle Sam is licking his chops as he waits to take a healthy bite of your good fortune (*the problem*).

As the old saying goes, it’s not what you make, it’s what you keep. So how do you avoid paying the tax man? Good news, there are some great options out there. If your capital gains are from real estate, you can execute a 1031 exchange. I won’t go in-depth on the logistics of this vehicle, but this strategy allows an investor to kick the tax can down the road while being able to scale up their real estate holdings. Most people have heard of a 1031, but what if your capital gains are from another asset (i.e. stocks)? Historically there hasn’t been a ton of great, or obvious, options but the recent tax reform changed that.

Opportunity Zones are the hot buzz word at every cocktail party (or at least they are at the ‘cool’ ones I go to). Partially because it allows capital gains from the sale of ANY asset to be reinvested without paying taxes in that fiscal year. Some of it also comes from additional tax benefits including a step-up in basis and not having to pay taxes on the capital gains of the new asset. A little more derives from being able to invest in different assets (real estate, a business, etc). But mostly, it’s because of the federal government. They have dangled the above-mentioned carrots, making it seem like there is little to no downside risk. This pent-up excitement has been dulled by the unknown. Should be interesting to find out all the rules to this game and we should be getting more guidance in Q2 2019.

The least sexy option, pay your taxes. Nothing wrong with this, especially if you can’t find an alternative route that makes financial sense. Don’t go either of the above two routes if the deal doesn’t fit your investment criterion purely to avoid paying taxes.

Per usual, be sure to do your homework on whatever route you go.