Save Me from Capital Gains Tax
No one likes to pay taxes. That’s a given, no matter your income. So, we are always looking for opportunities to help clients manage their tax bill. Making smart financial decisions is a critical part of our process at Christopher Street Financial.
We hear the refrain from our clients “if I sell my property…or my stock…or my company…then my profit will be swallowed up by taxes.” We get it. Fortunately, there are strategies to employ for appreciated assets or in high income tax years.
What are examples of a highly appreciated assets?
- Investment in stocks, such as Apple, Nvidia, or Microsoft
- Real estate, possibly with accrued depreciation
- Private investments or company shares
- Art and collectibles
Often, appreciated assets are held for far longer than makes sense. There are increasing risks and consequences to delaying your sale. You may be accepting more concentrated risk than is wise for your overall picture. But, by selling the asset, you can diversify your investments, lower your risk, and create sustainable income.
What if you can sell your appreciated asset AND manage your tax bill? Well, you can. The advisors at Christopher Street Financial can design strategies for your unique situation.
Here is a short preview of some of our tools to help you defer, offset, reduce, or even eliminate your capital gains tax.
#1: Kick the Can Down the Road, aka “Hold Assets Until Death”
It’s hard to think of a silver lining to your death. But, if an asset is owned until you are gone, these offensive capital gains can “disappear” for your heirs. This is due to a legal construct in which the basis of your asset will reset, or “step up”, to the market value as of your death date. Your heirs, then, can sell this asset immediately and pay zero in capital gains taxes.
The draw-back of this strategy is that it does nothing to diversify your risk or to provide liquidity during your lifetime.
#2: Supersize my Deduction, aka “Donating to Charities”
Another strategy for eliminating a capital gains tax bill completely is to donate your appreciated asset to a charity. While this will not create liquidity or income, you will benefit from a charitable income tax deduction. The appreciated asset can be donated either directly to a charitable organization, or to a donor advised fund for your future giving.
A donor advised fund, or DAF, is a charitable investment account which advisors at Christopher Street Financial can create for you. This type of account is associated with a 501(c)3 charity, so all donations to the account are tax-free and tax-deductible. Another benefit of a DAF is that the funds can be reinvested and used to grant to your charities over time.
Again, this strategy does not provide liquid funds for your life today.
#3: Have Your Cake and Eat it Too, aka “Charitable Trusts with Lifetime Income”
There are two types of trusts that can be very tax-effective for appreciated assets which do provide you with income: charitable remainder trusts (CRT) and charitable gift annuities (CGA). With both options, you donate your appreciated asset into a trust that can be customized to your needs and beneficiaries. You can then sell the appreciated asset inside the trust completely free of capital gains tax.
These trust structures can provide you with a lifetime stream of income, plus a charitable income tax deduction. Then, once the beneficiaries of the trust have died, the investments remaining will be paid to the charities of your choice.
#4: Bite the Bullet, aka “Pay the Tax Bill”
The final option to consider is to just sell your asset and realize the gain on all, or part, of the sale of your appreciated asset. The fact is, that tax rates on capital gains are historically low. In addition, the tax rate for capital gains is better than the rate you may pay on your “earned income”. You may want to consider a combination of these strategies to achieve your goals.
Next Steps
The team at Christopher Street Financial is experienced in these and other strategies. We would welcome the opportunity to educate you on the benefits available with each and design the strategy that is best for you. Click here to schedule an introductory call.
