Minimizing Taxes of Highly Appreciated Assets

| March 02, 2015

Mike's Blog


If your stocks, bonds, or other capital investments have large gains, there are some steps youcan take to minimize taxes. I'm going to touch on timing of the sale, using capital losses effectively, passing assets to heirs at your death and charitable giving.

Timing the sale of assets is important

If your capital assets have appreciated substantially, you can defer the capital gain depending on when you sell. If you wait longer than 12 months you get more favorable long-term capital gains tax treatment. The long-term capital gain rates range from 0% to 20% depending on what marginal tax bracket you're in. By contrast, short-term cap gains are taxed as ordinary income which will trigger more tax.

Also, if you expect to have substantial tax losses in a particular year, it may be wise to wait until that year to sell, so that the resulting gain can be offset.

Using capital losses effectively

You can minimize taxation of your capital gain income by using capital losses against them. To be more specific, you can generate capital losses to offset capital gains, and you can use your capital gain income to utilize unused losses carried over from previous years. Capital losses must be netted against capital gains in a specific manner. Excess losses may then be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income per year. Losses remaining after the limit may be carried forward indefinitely to offset future gains and income.

Planning with capital losses can be an important method of minimizing taxes on highly appreciated assets. If you expect to recognize a substantial capital gain this year, you should review your portfolio to make use of any capital losses you may have.

Is it better to gift highly appreciated assets during your lifetime or to pass them to others at death?

Property that already has large built up capital gains may not be the best candidate for a gift to a non-charity. That's because the recipient of the gift takes over the cost-basis in the property; if you paid $1 for a stock and now it's worth $100 and then you give it to your daughter, she keeps your cost basis of $1 and she'll owe tax on the gain over that amount when she sells it.

You may not want to gift highly appreciated property if the recipient will have large capital gains when the property is sold.

To contrast, the cost-basis of property passed at your death is generally stepped up to its fair market value at the time of your death.

If you paid $1 for a stock and now it's worth $100, and you pass this stock to your daughter at death, her cost basis is $100, not $1 in the case of a gift. As you can see capital assets do not receive a step-up in basis through gifting.

Gifting highly appreciated assets to charity

When you donate stock or other intangible long-term capital gain property to a qualified public charity, you can deduct the full fair market value of the property up to the limits set by the IRS. Amounts exceeding those limits can be carried over and deducted for up to five succeeding years. Also the public charity will be able to sell the property free of taxes.

You benefit in two ways: (1) you get a tax deduction, and (2) you remove interest, dividends, and/or capital gains from your investment portfolio.

If you're interested in donating highly appreciated assets to charity, it is important to know the relevant rules. Also, certain types of property may be more advantageous to donate to charity than others.

Before considering any of these strategies it is advisable to check with a knowledgeable professional before proceeding.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.