Reducing Long Term Capital Gains

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zeekhb
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Reducing Long Term Capital Gains

Post by zeekhb »

Does anyone have any advice or recommendations on how people reduce their long term capital gains when selling stock? I have a bunch of ISOs from a private company that I exercised about 10 years ago. They're now worth about 2.2 million dollars. I can sell these back to the company at any time, but the long term capital gains is brutal - I'll owe almost $750k in taxes for both federal and state.

Are there ways the wealthy use the tax law to reduce that hit? I've read the more traditional articles on putting it into an IRA or charity, etc - but I'm not looking to lock the money up into something unless it generates some kind of cash flow. Some of these are probably stupid questions, but I'm gonna ask anyways...

1. Can I take the proceeds from a stock sale and roll it into real estate to avoid long term capital gains (or to reduce it)?
2. If I had a business that involved real estate investments and rental properties and I could claim a million dollars of depreciation in a year, would that help offset the long term capital gains i'd have to pay on the stock sale?
3. If I had any other kind of business (IE a pizza shop or restaurant, etc), would owning that business somehow provide me with a way to claim less long term capital gains?

I'm just curious what techniques or tax incentives are available to help lower the amount of capital gains on this kind of stock sale.

Thanks!
RyeBourbon
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Re: Reducing Long Term Capital Gains

Post by RyeBourbon »

Gift the stock to someone else and let them pay the tax.

Or donate to charity.
Retired June 2023. AA = 55/35/10
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LiveSimple
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Re: Reducing Long Term Capital Gains

Post by LiveSimple »

Good luck on your investments, just pay the tax and move on. I do not know a way to pay less tax on long term capital gains, unless you donate or leave it to your estate / Inheritance, then you pay $0 in taxes. Good problem to have, in my thinking...
If this is a humble brag, good for you, we got it.... :sharebeer
Invest when you have the money, sell when you need the money, for real life expenses...
secondcor521
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Re: Reducing Long Term Capital Gains

Post by secondcor521 »

There are some ways to avoid LTCG. Die and let your heirs get a step up in basis. Hold the stock for more than a year and donate the stock to a charity or DAF. Don't sell the investment. AFAIK, these are the methods that the wealthy use.

There are some ways to reduce LTCG taxes. Have less ordinary income so it is taxed at a lower rate is the only one that comes to mind.

There are many ways to offset LTCG taxes, but these are general tax moves and would mostly apply regardless of realizing LTCG. Realize capital losses. Have other tax credits. Have business losses (see #2 below). Contribute to an HSA. Give to charity. Have large itemized deductions (hard to do these days).

To answer your questions:

1. Nope.

2. Depreciation in a business is a deductible expense. I think there are various limits, so $1M might be hard to achieve. I know that RE depreciation will ultimately be recaptured and/or affect capital gains once the real estate is sold or disposed of. So it acts more like tax deferral than tax avoidance. But this is just one category of the general approach of offsetting taxable income.

3. Nope.
Last edited by secondcor521 on Wed Oct 20, 2021 4:14 pm, edited 1 time in total.
Nowizard
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Re: Reducing Long Term Capital Gains

Post by Nowizard »

Significant stock market losses have occurred over concern about paying taxes. Best to pay them in most cases, though you can figure the top of your marginal bracket and sell to that point each year.

Tim
jebmke
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Re: Reducing Long Term Capital Gains

Post by jebmke »

secondcor521 wrote: Wed Oct 20, 2021 4:14 pm There are some ways to avoid LTCG. Die and let your heirs get a step up in basis.
For the very wealthy, dying promptly in 2010 was particularly lucrative.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
Californiastate
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Re: Reducing Long Term Capital Gains

Post by Californiastate »

jebmke wrote: Wed Oct 20, 2021 4:16 pm
secondcor521 wrote: Wed Oct 20, 2021 4:14 pm There are some ways to avoid LTCG. Die and let your heirs get a step up in basis.
For the very wealthy, dying promptly in 2010 was particularly lucrative.
IIRC Steinbrenner died that year.
Topic Author
zeekhb
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Re: Reducing Long Term Capital Gains

Post by zeekhb »

Thanks for the info so far...

So, if I were to sell in a year where I made no income. Let's assume I quit my job and don't work that year, then if I sell this stock, my capital gains will be lower?

In regards to depreciation in a business or real estate, is that something that only influences the income generated from the business/real estate? So that wouldn't have any influence on the long term capital gains I pay on the stock sale?
surfstar
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Re: Reducing Long Term Capital Gains

Post by surfstar »

Wait for it to have a negative return and enjoy Tax Loss Harvesting! :oops:
gfirero
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Re: Reducing Long Term Capital Gains

Post by gfirero »

zeekhb wrote: Wed Oct 20, 2021 4:44 pm Thanks for the info so far...

So, if I were to sell in a year where I made no income. Let's assume I quit my job and don't work that year, then if I sell this stock, my capital gains will be lower?
Your capital gains doesn't change, but your capital gains tax might be lower because of the progressive/marginal nature of the tax code. For example, if you have no other income the first $80,000 in capital gains is taxed at 0%. If you have W-2 income this 0% bracket is first filled up by your W-2 income which pushes more of your capital gains into the higher tax brackets.
This article from Kitces has a good graph explaining how income "stacks" https://www.kitces.com/blog/long-term-c ... in-0-rate/

Other ideas to consider:
Opportunity zones: you can get into a situation where the tax benefit of these is offset by their performance. Don't let the "tax tail wag the dog" Really need to do your due diligence. https://www.taxpolicycenter.org/briefin ... -they-work

Exchange Funds/Swap funds: https://www.robinsonsmithwealth.com/blo ... stock-risk

I don't have experience with either, but I believe there are other posts from folks that do
MrJedi
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Re: Reducing Long Term Capital Gains

Post by MrJedi »

If you are charitably inclined you can gift them (or a portion) into a DAF. Then use the DAF for all of your charitable gifts for the next several years in lieu of direct checks/cash.
SubPar
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Re: Reducing Long Term Capital Gains

Post by SubPar »

zeekhb wrote: Wed Oct 20, 2021 3:22 pm 1. Can I take the proceeds from a stock sale and roll it into real estate to avoid long term capital gains (or to reduce it)?
2. If I had a business that involved real estate investments and rental properties and I could claim a million dollars of depreciation in a year, would that help offset the long term capital gains i'd have to pay on the stock sale?
3. If I had any other kind of business (IE a pizza shop or restaurant, etc), would owning that business somehow provide me with a way to claim less long term capital gains?

Thanks!
1. Yes. Opportunity Zone investment will allow for deferral of your realized gain until tax year 2026 and, assuming you make the qualifying investment by EOY 2021, would be eligible for 10% basis step-up if held until 2026. Though, you'd be subject to whatever the LTCG rate is in 2026, so there's that. Further appreciation would also be eligible for step-up to FMV if held for 10 years in total. As prior poster noted, this comes with a separate set of risks. There's a lot more nuance here that I won't go into.
2. You're subject to passive activity limitations and would need to meet material participation thresholds to be deemed a Real Estate Professional and actually have the ability to deduct losses in excess of income. Residential real estate is depreciated straight-line over 27.5 years; commercial property is straight-line over 39 years. It'd take a significant investment to generate that kind of depreciation loss. Practically speaking, to actually depreciate >$1MM (assuming you even meet REP qualifications), you'd likely have to rely on 100% bonus depreciation of all 5/7/15 year property, which would require a cost segregation study. (Side bar: bonus depreciation starts to phase out in tax year 2023, so time is of the essence.) Though, even if you were to go this route, you're subject to at least some element of recapture at ordinary rates for the 5/7/15 year property and unrecaptured 1250 gain, which is capital in nature, for the 27.5 property. In short, you're going to end up getting smoked on the back end of your deal. This would be a questionable strategy, IMO.
3. If you lose money, maybe?

There are a finite number of ways to mitigate tax exposure and the main ways have already been noted. If you're going to have a big tax bill due, you want it to be long-term capital in nature.

My two pennies: Take your medicine. Accept your win. Pay your tax.

Edit to clarify my OZ response.
Last edited by SubPar on Wed Oct 20, 2021 7:40 pm, edited 4 times in total.
FoolMeOnce
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Re: Reducing Long Term Capital Gains

Post by FoolMeOnce »

You might be able to avoid the state capital gains tax by moving to a different state.
moneyflowin
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Re: Reducing Long Term Capital Gains

Post by moneyflowin »

1. Never sell it. Just borrow on margin against it. Then pass to your heirs

2. Sell little by little over years, which reduces the tax

3. Move to Puerto Rico.
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whodidntante
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Re: Reducing Long Term Capital Gains

Post by whodidntante »

Use box spread financing to borrow against your portfolio at institutional rates, and roll the loan until you have a low tax year or until you die. Bonus: this generates a current year capital loss equal to your financing cost.

If you have a portfolio large enough to impress not just your mom, but someone else's mom, you can get term certain low interest offers from your private banker. And if you can't, get yourself a new private banker. You'll need 5m+ to impress someone else's mom. 10m is more impressive, though.
Phil DeMuth
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Re: Reducing Long Term Capital Gains

Post by Phil DeMuth »

>> Use box spread financing to borrow against your portfolio at institutional rates, and roll the loan until you have a low tax year or until you die. Bonus: this generates a current year capital loss equal to your financing cost <<

Is this true? My understanding is that you can only deduct the interest if you are using the loan to finance investments, but not if you are using the loan for personal consumption.
Topic Author
zeekhb
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Re: Reducing Long Term Capital Gains

Post by zeekhb »

What is borrowing against margin? Just for reference, these shares are held in a Morgan Stanley account. This company is not publicly traded but I have the option to sell these shares back to the company at certain times. I'm not sure if that makes any difference or not.
jarjarM
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Re: Reducing Long Term Capital Gains

Post by jarjarM »

zeekhb wrote: Thu Oct 21, 2021 1:41 pm What is borrowing against margin? Just for reference, these shares are held in a Morgan Stanley account. This company is not publicly traded but I have the option to sell these shares back to the company at certain times. I'm not sure if that makes any difference or not.
That means using your shares/options as collateral and borrow against it. This was widely discussed by the media a few months ago as a way for the very wealthy to pay as little of CG tax as possible since they will get a step up basis as time of death for the heirs. However, given your options is on non-public shares, it may be difficult to use it as collateral.

As for your question, opportunity zone investment is one possibility, another is to realize part of it during low income years or years with significant capital loss.
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calmaniac
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Re: Reducing Long Term Capital Gains

Post by calmaniac »

If there is a market crash, can used tax loss harvesting to move into index ETFs without capital gains. Worked well for me during the March 2020 COVID crash. See BH below.

viewtopic.php?p=5782845#p5782845
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bubbly
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Re: Reducing Long Term Capital Gains

Post by bubbly »

moneyflowin wrote: Wed Oct 20, 2021 8:46 pm 1. Never sell it. Just borrow on margin against it. Then pass to your heirs

2. Sell little by little over years, which reduces the tax

3. Move to Puerto Rico.
I would add if there's a liquidity event where you need a large sum of money, a 401k loan could be appropriate if you wanted to avoid selling the ISOs. The risk is if your employment is terminated, you are on the hook for the remaining balance and will need to sell the ISOs anyways. There is also a lot of fine print specific to each 401k plan so that's another potential pitfall to this approach. Most of the time, this is a bad approach but for some, it can be a nontaxable way to borrow some money on a short notice.
deltaneutral83
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Re: Reducing Long Term Capital Gains

Post by deltaneutral83 »

23% isn't that bad on gains at the Federal level. Your state is your state, nothing to do unless you plan to move. If you plan to live another 10-15 years you can also spread it out and hope to get the 15% LTCG, but day job and current AGI wasn't mentioned. This of course is all based on the here and now which is all we are permitted to reference. If it were index funds, I'd figure out a way take margin loans from IB and get the step up at death to heirs, or other specialty financing. Single stock would personally scare me so that's why I'd at least begin to wind it down.
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zeekhb
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Re: Reducing Long Term Capital Gains

Post by zeekhb »

Thanks for all the info so far. Currently salary 167k per year.

I've been planning to move to another state anyways to be closer to family, so I may sell some once I do that so the state taxes are less. I'm in California, so the state tax is ridiculous compared to others.

The stock I have is increasing on average about 30-40% per year. So, I may decide to just skim off the top every year to keep the long term cap gains tax rate at 15%. My hope was to sell everything and have my financial advisor manage it with the hope of returning the average 6-7% and withdrawing about 5k per month. But since this stock has been growing at 30-40% per year, it might make more sense to just skim off the top (to keep taxes below 15%) and let the stock continue to grow in value.
gonefishing01
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Re: Reducing Long Term Capital Gains

Post by gonefishing01 »

Tax rates are possibly as low as they will ever be right now. Pay the taxes to diversify and move on.
I sold a very large chunk of a concentrated position this year and this was my plan- sell at the beginning of the year, lump sum into AA, hope for some deep tax loss harvesting opportunities. The market has just kept climbing in 2021 so I haven't had as many impactful TLH opportunities as expected. Boo hoo. :beer
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calmaniac
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Re: Reducing Long Term Capital Gains

Post by calmaniac »

zeekhb wrote: Fri Oct 22, 2021 2:32 pm But since this stock has been growing at 30-40% per year, it might make more sense to just skim off the top (to keep taxes below 15%) and let the stock continue to grow in value.
This too will end. No stock keeps growing at that rate forever.

Keep some of it, but keep selling to diversify as well. As the years tick by and capital gains accrue, it can get harder and harder to diversify without paying a lot of taxes. Fast forward and suddenly you are nearing retirement and feel vulnerable with a poorly diversified portfolio. Google "General Electric stock"

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Re: Reducing Long Term Capital Gains

Post by mrspock »

Congrats. You discovered why you sell upon vest/exercise: you will get burned by taxes if you don’t (vs index funds you can hold until death).

Your options are to:
1. Sell now to diversify and pay taxes
2. Hang on until you retire and sell as source of income at a much lower tax rate (40k/yr of capital gains or so is tax free). Look at the GE chart above and be sure you understand how badly this can play out.
3. Hang on until death at which point your heirs get a the step up basis (if it survives that long).
4. Donate the shares, collect the deduction, if you are the sort who gives to charity.

#1 and #4 are the only “right” answers in this list, unless the shares represent below 10-15% of your portfolio.


There is no magic here… anyone that tells you different, will probably get you imprisoned or heavily fined by the IRS. As
for the wealthy… they have way better lawyers than you. You are going to goto jail following their tactics (Panama papers etc)… they won’t. They will tie things up in court for years, eventually settling with the IRS. You can’t afford that game, so don’t play it.
123
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Re: Reducing Long Term Capital Gains

Post by 123 »

Depending on your age you may decide to do the waiting game to avoid capital gains taxes.

History seems to show that even the strongest and mightiest companies eventually fall, many vanish entirely. Kodak, Polaroid, RCA, Pan American Airlines, Trans World Airlines, Enron, Lehman Brothers, the list goes on and on. All were leaders in business management and use of technology.

Just hold on and wait, the capital gains tax issue will eventually go away. Trust me.
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zeekhb
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Re: Reducing Long Term Capital Gains

Post by zeekhb »

Thanks again for all the helpful advice. This is better advice that I was given by calling a couple tax advisors.

I definitely understand that betting on one stock is a massive risk and that things could go down. But I'm willing to take that risk on this particular company. I worked there for a while early on in the company. The first 10 years of existence the value was pretty flat. Then from 2015 to 2020 it went up about 4x over that time. In the last year it has gone up 1.8x, so it's just now starting to take off in value. The business continues to attract a massive amount of investor attention. I'm sure it will level off or go down at some point.

For now though, it sounds like my best bet is to just take either 40k per year (at 0% federal) or I might take 100k out per year and pay the 15% - all while letting this stock increase in value to a point where I think it's time to cash out.

Another tax question...
Let's say I take 100k out in one year and pay the 15% capital gains, am I also going to have to report that as income and then have to pay income tax on that?
moneyflowin
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Re: Reducing Long Term Capital Gains

Post by moneyflowin »

You're asking a forum of conservative, risk-adverse investors what to do. Of course you're going to get a certain answer. Ask the same Q on reddit/WSB and you'll get a different answer.

Some companies turn into Intel or Cisco (up huge then flat for decades). Some go out of business (Enron). Had I kept my options instead of selling them decades ago, I'd have $40M today.

You know your company better than we do. You decide
moneyflowin
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Re: Reducing Long Term Capital Gains

Post by moneyflowin »

zeekhb wrote: Fri Oct 22, 2021 5:16 pm For now though, it sounds like my best bet is to just take either 40k per year (at 0% federal)

That's not how it works. Your cap gains is added to all your other income to determine the cap gains bracket you're in. For instance, if you have $170k of W2 and $50k of L/T cap gains, you're not in the 0% cg bracket anymore. The entire $50k is in the 15% bracket.

Not only that, but you're now partly into the 3.8% Obamacare bracket (assuming single)

The above is simplified -- I didn't apply deductions, but you get the point.
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gobel
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Re: Reducing Long Term Capital Gains

Post by gobel »

zeekhb wrote: Wed Oct 20, 2021 3:22 pm I have a bunch of ISOs from a private company that I exercised about 10 years ago. They're now worth about 2.2 million dollars.
Check with your company if your exercise qualified as QSBS stock. The whole 2.2m might be tax free since you've already held 5 years. https://www.qsbsexpert.com/qsbs-basics/
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Re: Reducing Long Term Capital Gains

Post by 4nursebee »

zeekhb wrote: Wed Oct 20, 2021 3:22 pm Does anyone have any advice or recommendations on how people reduce their long term capital gains when selling stock? I have a bunch of ISOs from a private company that I exercised about 10 years ago. They're now worth about 2.2 million dollars. I can sell these back to the company at any time, but the long term capital gains is brutal - I'll owe almost $750k in taxes for both federal and state.

Are there ways the wealthy use the tax law to reduce that hit? I've read the more traditional articles on putting it into an IRA or charity, etc - but I'm not looking to lock the money up into something unless it generates some kind of cash flow. Some of these are probably stupid questions, but I'm gonna ask anyways...

1. Can I take the proceeds from a stock sale and roll it into real estate to avoid long term capital gains (or to reduce it)?
2. If I had a business that involved real estate investments and rental properties and I could claim a million dollars of depreciation in a year, would that help offset the long term capital gains i'd have to pay on the stock sale?
3. If I had any other kind of business (IE a pizza shop or restaurant, etc), would owning that business somehow provide me with a way to claim less long term capital gains?

I'm just curious what techniques or tax incentives are available to help lower the amount of capital gains on this kind of stock sale.

Thanks!

All right, I am really confused on the math. Can you explain your expected tax to me, what the cap gain is, and perhaps what state you are in? The most I can come up with for cap gains is 660K if you live in CA.

Edit: OK, I see there are some income things that can push up the Fed Cap gains another 5%. I'd still hope for an explanation, though you would likely be better to split sale up over several years.
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Re: Reducing Long Term Capital Gains

Post by bradinsky »

Congratulations?! I’d love to have your problem. Much better to pay capital gains taxes on a healthy profit than it is to lose your butt on an investment.
Shallowpockets
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Re: Reducing Long Term Capital Gains

Post by Shallowpockets »

OP. What is the stock? I am skeptical that there is a stock growing at 30-40% a year. For how many years?
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zeekhb
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Re: Reducing Long Term Capital Gains

Post by zeekhb »

4nursebee wrote: Sat Oct 23, 2021 4:25 am
zeekhb wrote: Wed Oct 20, 2021 3:22 pm Does anyone have any advice or recommendations on how people reduce their long term capital gains when selling stock? I have a bunch of ISOs from a private company that I exercised about 10 years ago. They're now worth about 2.2 million dollars. I can sell these back to the company at any time, but the long term capital gains is brutal - I'll owe almost $750k in taxes for both federal and state.

Are there ways the wealthy use the tax law to reduce that hit? I've read the more traditional articles on putting it into an IRA or charity, etc - but I'm not looking to lock the money up into something unless it generates some kind of cash flow. Some of these are probably stupid questions, but I'm gonna ask anyways...

1. Can I take the proceeds from a stock sale and roll it into real estate to avoid long term capital gains (or to reduce it)?
2. If I had a business that involved real estate investments and rental properties and I could claim a million dollars of depreciation in a year, would that help offset the long term capital gains i'd have to pay on the stock sale?
3. If I had any other kind of business (IE a pizza shop or restaurant, etc), would owning that business somehow provide me with a way to claim less long term capital gains?

I'm just curious what techniques or tax incentives are available to help lower the amount of capital gains on this kind of stock sale.

Thanks!

All right, I am really confused on the math. Can you explain your expected tax to me, what the cap gain is, and perhaps what state you are in? The most I can come up with for cap gains is 660K if you live in CA.

Edit: OK, I see there are some income things that can push up the Fed Cap gains another 5%. I'd still hope for an explanation, though you would likely be better to split sale up over several years.
I just used an online long term capital gains calculator. I plugged in the priced I paid (8,081) for these shares and the sale price (2,134,000). I looked at the LTCG assuming I was making my current salary 167k in California, also looked at what it would be if I had no labor income, and then looked at it if I were to move out of state. Seems like different calculators have different results. I used one from "smartasset.com" and it was showing 769,003 assuming I live in California and have a salary of 167k. If I dont have a salary, then it drops to 734k. However putting the same info to other websites I get a different value of about 654k so I'm not sure which is correct.
4nursebee
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Re: Reducing Long Term Capital Gains

Post by 4nursebee »

zeekhb wrote: Sun Oct 24, 2021 9:34 am
4nursebee wrote: Sat Oct 23, 2021 4:25 am
zeekhb wrote: Wed Oct 20, 2021 3:22 pm Does anyone have any advice or recommendations on how people reduce their long term capital gains when selling stock? I have a bunch of ISOs from a private company that I exercised about 10 years ago. They're now worth about 2.2 million dollars. I can sell these back to the company at any time, but the long term capital gains is brutal - I'll owe almost $750k in taxes for both federal and state.

Are there ways the wealthy use the tax law to reduce that hit? I've read the more traditional articles on putting it into an IRA or charity, etc - but I'm not looking to lock the money up into something unless it generates some kind of cash flow. Some of these are probably stupid questions, but I'm gonna ask anyways...

1. Can I take the proceeds from a stock sale and roll it into real estate to avoid long term capital gains (or to reduce it)?
2. If I had a business that involved real estate investments and rental properties and I could claim a million dollars of depreciation in a year, would that help offset the long term capital gains i'd have to pay on the stock sale?
3. If I had any other kind of business (IE a pizza shop or restaurant, etc), would owning that business somehow provide me with a way to claim less long term capital gains?

I'm just curious what techniques or tax incentives are available to help lower the amount of capital gains on this kind of stock sale.

Thanks!

All right, I am really confused on the math. Can you explain your expected tax to me, what the cap gain is, and perhaps what state you are in? The most I can come up with for cap gains is 660K if you live in CA.

Edit: OK, I see there are some income things that can push up the Fed Cap gains another 5%. I'd still hope for an explanation, though you would likely be better to split sale up over several years.
I just used an online long term capital gains calculator. I plugged in the priced I paid (8,081) for these shares and the sale price (2,134,000). I looked at the LTCG assuming I was making my current salary 167k in California, also looked at what it would be if I had no labor income, and then looked at it if I were to move out of state. Seems like different calculators have different results. I used one from "smartasset.com" and it was showing 769,003 assuming I live in California and have a salary of 167k. If I dont have a salary, then it drops to 734k. However putting the same info to other websites I get a different value of about 654k so I'm not sure which is correct.
Thanks, I think I would just split the sale up over several years to lower the tax burden.
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Topic Author
zeekhb
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Re: Reducing Long Term Capital Gains

Post by zeekhb »

Thanks for the help. Wanted to also mention I bought these shares 12 years ago. So it's taken some time get to this value...but proves good things come to those who wait
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