My personal hedge fund?

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jazzmania
Posts: 8
Joined: Sun Feb 23, 2020 4:51 pm

My personal hedge fund?

Post by jazzmania »

Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
fyre4ce
Posts: 2544
Joined: Sun Aug 06, 2017 11:29 am

Re: My personal hedge fund?

Post by fyre4ce »

I'm no expert on C-corp taxation, but I do know that C-corp profits are taxed twice - once at the corporate level, and then again as dividends at the personal level. If you pay a 21% corporate tax rate and a 15% individual tax rate, your net tax rate is 1 - (1-21%)*(1-15%) = 32.85%. I'm not sure you will want what you get. You're almost certainly better off just owning the assets personally and getting the benefit of reduced rates on long-term capital gains and qualified dividends.

One purpose of the corporate tax is to prevent owners from treating the C-corp as a personal 401k, where profits can be retained tax-free for years and realized at optimal times. "Your money will keep growing inside the corporation" - not really true, as net profits get assessed a corporate tax every year. But can you just use your own retirement accounts? They were created for basically the purpose you describe, and come with all the tax benefits (or more) and none of the complexity and double-taxation.

Edit: By the way, you may or may not know that the prevailing opinion here on Bogleheads is that actively trading stocks and options is not a long-term winning investment strategy. That's a whole separate discussion, which we can get into if you like, but one of the main reasons (besides lower expected returns and higher expected transaction costs) is that if this trading must be done in a taxable account, there is a substantial tax cost as well, which lowers net returns compared to a buy-and-hold strategy. Investors who have ample space inside retirement accounts to do their trading aren't affected by this, but have a $2M taxable account and don't mention any retirement accounts, so I'm left to surmise this is the problem you want to create the C-corp to try to solve. A change in strategy would also at least partially solve this problem, plus bring other benefits too.
khunron
Posts: 137
Joined: Tue Apr 18, 2017 6:29 pm

Re: My personal hedge fund?

Post by khunron »

"Say you are actively trading stocks and options"....

I'd say you're not a Boglehead and should probably be asking this on Reddit.
Lastrun
Posts: 1512
Joined: Wed May 03, 2017 6:46 pm

Re: My personal hedge fund?

Post by Lastrun »

jazzmania wrote: Thu Oct 21, 2021 12:29 am What am I missing?
The possible imposition of the Personal Holding Company Tax and the Accumulated Earnings Tax.

https://www.irs.gov/faqs/small-busines ... entities-5
grkmec
Posts: 255
Joined: Wed Jun 22, 2016 8:46 am

Re: My personal hedge fund?

Post by grkmec »

jazzmania wrote: Thu Oct 21, 2021 12:29 am Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
This won’t work. A hedge fund is a legal structure, like an LLC or LLP, which are pass through entities. By putting your investments into a such structures does nothing to reduce taxes. If you want to structure something to nearly avoid all taxes as a US Citizen, there is only one way:

1) move to Puerto Rico, become a resident, and start a hedge fund Under ACT 60. This exempts your from capital gains and dividend taxes

The next best option would be to:

2) start a Bermuda insurance company and contribute all investment securities as paid in capital. Run the insurance company in a way where you try to break even on the insurance underwriting and invest the assets like a rock star. Your returns won’t be subject to taxes and will compound tax free. Any short term capital gains will basically be converted to long term capital gains by when you eventually sell the stock of the insurance company. You need to be clever ok how you structure this to remain compliant under the IRS PFIC rules

Finally the lease desirable option would be to renounce your citizenship and get citizenship in a county with no taxes on investment income.

Or you can do what I did — take most of your taxable account money and invest it into commercial real estate and QSBS private equity funds.

Good luck
Tanelorn
Posts: 2370
Joined: Thu May 01, 2014 9:35 pm

Re: My personal hedge fund?

Post by Tanelorn »

fyre4ce wrote: Thu Oct 21, 2021 12:39 am I'm no expert on C-corp taxation, but I do know that C-corp profits are taxed twice - once at the corporate level, and then again as dividends at the personal level. If you pay a 21% corporate tax rate and a 15% individual tax rate, your net tax rate is 1 - (1-21%)*(1-15%) = 32.85%. I'm not sure you will want what you get. You're almost certainly better off just owning the assets personally and getting the benefit of reduced rates on long-term capital gains and qualified dividends.
Plus the corporate tax rate is, in all current proposals, slated to rise more by more than the personal income tax at your income levels, so the double taxation burden could well be higher going forward than it appears now.

Plus in the corporate structure, you lose selective tax loss harvesting relative to your personal tax situation.

If you’re really trading that much, you can also elect Mark to market trader accounting, which will give you more deductions for expenses as well as ordinary losses if you lose money one year, but otherwise the gains will be ordinary rather than capital.
Nysoz
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Re: My personal hedge fund?

Post by Nysoz »

I've looked into this a bit due to my significant trading activity and asked the question not too long ago. Definitely consult with your CPA regarding the best way forward.

An S-corp unlocks a little benefit and depending on your circumstances may be worth it.

A C-corp is potentially beneficial at higher profit levels but has its own problems. So all profits are taxed at corporate tax rate (may or may not change). To get money, you pay yourself a W2 salary and the self employment tax as well as personal income tax on this portion. The W2 isn't double taxed by the corporation because since it's a business expense it's deducted from the corporation profits.

What is double taxed is any dividends you pay yourself on top of your reasonable salary. That gets taxed at the corporate level then the individual dividend rate. There's a potential accumulated earnings tax of 20% above $250k. To get around this, you retain that money back into the corporation. The trick here is to convince the IRS that anything above that is considered reasonable needs of the business then it can be potentially exempted. This allows you to grow your business faster by paying less taxes to reinvest.

The next problem is upon liquidation. You'll still have to pay the taxes on all of this when you decide you don't want to trade anymore and dissolve your business.

To do this, you need to meet the requirements for tax trader status. Then you can potentially elect mark to market if you choose after this.
fyre4ce
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Re: My personal hedge fund?

Post by fyre4ce »

grkmec wrote: Thu Oct 21, 2021 6:40 am Finally the lease desirable option would be to renounce your citizenship and get citizenship in a county with no taxes on investment income.
I hear Somalia is nice this time of year.
pizzy
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Re: My personal hedge fund?

Post by pizzy »

jazzmania wrote: Thu Oct 21, 2021 12:29 am Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
How many years have you been “actively trading stock and options” at your current level?
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
bhough
Posts: 259
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Re: My personal hedge fund?

Post by bhough »

Lastrun wrote: Thu Oct 21, 2021 6:03 am
jazzmania wrote: Thu Oct 21, 2021 12:29 am What am I missing?
The possible imposition of the Personal Holding Company Tax and the Accumulated Earnings Tax.

https://www.irs.gov/faqs/small-busines ... entities-5
Wow, nice answer. You just taught me something. Ty friend.
b
Topic Author
jazzmania
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Joined: Sun Feb 23, 2020 4:51 pm

Re: My personal hedge fund?

Post by jazzmania »

Lastrun wrote: Thu Oct 21, 2021 6:03 am
jazzmania wrote: Thu Oct 21, 2021 12:29 am What am I missing?
The possible imposition of the Personal Holding Company Tax and the Accumulated Earnings Tax.

https://www.irs.gov/faqs/small-busines ... entities-5
You just poured cold water over the entire idea. Thank you!
4nursebee
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Location: US

Re: My personal hedge fund?

Post by 4nursebee »

jazzmania wrote: Thu Oct 21, 2021 12:29 am Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
I don't think you need to be so fancy. Perhaps peruse the Green Trader Tax site and learn what pros use (and who many pros use). https://greentradertax.com/trader-tax-c ... o-qualify/

If this applies to you, I would stop asking for such advice here, people will not understand or be supportive. They will in fact ridicule you and tear you down. Your regular local CPA might be similarly ignorant, you will need to know more and guide your CPA or hire one that is not local.
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JoeRetire
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Re: My personal hedge fund?

Post by JoeRetire »

jazzmania wrote: Thu Oct 21, 2021 12:29 amWhat am I missing?
A discussion with your accountant.
This isn't just my wallet. It's an organizer, a memory and an old friend.
Tanelorn
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Re: My personal hedge fund?

Post by Tanelorn »

jazzmania wrote: Thu Oct 21, 2021 11:48 pm
Lastrun wrote: Thu Oct 21, 2021 6:03 am
jazzmania wrote: Thu Oct 21, 2021 12:29 am What am I missing?
The possible imposition of the Personal Holding Company Tax and the Accumulated Earnings Tax.

https://www.irs.gov/faqs/small-busines ... entities-5
You just poured cold water over the entire idea. Thank you!
I’m not so sure. My quick read of UPHCI is that it’s only dividends and interest earned in your case, but not capital gains. So as long as your trading activity primarily generates capital gains rather than dividends or interest (or other passive income like royalties, etc that you don’t mention), it would not be hit with the PHC tax. For dividends, you could monitor your liquid stock positions and sell them before any ex-dividend date and rebuy them the next day to avoid the dividend at very low transactional costs. I don’t think you need to worry too much about interest with rates being near zero, unless you’re investing heavily in bonds rather than stocks.

Worst comes to worst, you can set up a foreign PHC which is excluded from this tax and, if properly constructed, seems to still be worthwhile, ie.

https://barbosalegal.com/chronicles/hol ... -defer-tax
Shallowpockets
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Re: My personal hedge fund?

Post by Shallowpockets »

Is any of that worth it in the long run?
After all, if you are making great money and are wealthy enough, what is the point? If you pay your taxes, would you not still be wealthy?
Topic Author
jazzmania
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Joined: Sun Feb 23, 2020 4:51 pm

Re: My personal hedge fund?

Post by jazzmania »

grkmec wrote: Thu Oct 21, 2021 6:40 am
jazzmania wrote: Thu Oct 21, 2021 12:29 am Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
This won’t work. A hedge fund is a legal structure, like an LLC or LLP, which are pass through entities. By putting your investments into a such structures does nothing to reduce taxes. If you want to structure something to nearly avoid all taxes as a US Citizen, there is only one way:

1) move to Puerto Rico, become a resident, and start a hedge fund Under ACT 60. This exempts your from capital gains and dividend taxes

The next best option would be to:

2) start a Bermuda insurance company and contribute all investment securities as paid in capital. Run the insurance company in a way where you try to break even on the insurance underwriting and invest the assets like a rock star. Your returns won’t be subject to taxes and will compound tax free. Any short term capital gains will basically be converted to long term capital gains by when you eventually sell the stock of the insurance company. You need to be clever ok how you structure this to remain compliant under the IRS PFIC rules

Finally the lease desirable option would be to renounce your citizenship and get citizenship in a county with no taxes on investment income.

Or you can do what I did — take most of your taxable account money and invest it into commercial real estate and QSBS private equity funds.

Good luck
Thank you, this is very helpful. I've been thinking of moving to Puerto Rico anyway, so this tax thing is a bonus. Are capital gains and dividends tax exempt for all PR residents or only for companies started under ACT 60? If a person has certain unrealized capital gains of $X before they move to PR, and the gains grow to $Y after their move to PR, do they owe federal income taxes on $X, $Y, or ($Y - $X)?
Topic Author
jazzmania
Posts: 8
Joined: Sun Feb 23, 2020 4:51 pm

Re: My personal hedge fund?

Post by jazzmania »

4nursebee wrote: Fri Oct 22, 2021 4:41 am
jazzmania wrote: Thu Oct 21, 2021 12:29 am Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
I don't think you need to be so fancy. Perhaps peruse the Green Trader Tax site and learn what pros use (and who many pros use). https://greentradertax.com/trader-tax-c ... o-qualify/

If this applies to you, I would stop asking for such advice here, people will not understand or be supportive. They will in fact ridicule you and tear you down. Your regular local CPA might be similarly ignorant, you will need to know more and guide your CPA or hire one that is not local.
Thank you. While I trade frequently, it is not frequent enough to qualify for trader tax status. But I didn't know this was a thing, so thank you for sharing!
hachiko
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Re: My personal hedge fund?

Post by hachiko »

If you don't qualify for trader tax status then using a c Corp is definitely no unless you have other business activity you can use to get you out of the pocketbook taxes others have mentioned (AET, PHC, etc.)

If you do qualify, there can certainly be a benefit, but it takes a very specific set of circumstances and enough knowledge and time to handle all the accompanying compliance burdens yourself, or enough of a profit to reap the tax benefits even after paying someone else to handle the compliance burdens for you.
Made money. Lost money. Learned to stop counting.
surfstar
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Location: Santa Barbara, CA

Re: My personal hedge fund?

Post by surfstar »

Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Invictus002
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Re: My personal hedge fund?

Post by Invictus002 »

surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
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Nate79
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Re: My personal hedge fund?

Post by Nate79 »

Invictus002 wrote: Fri Oct 22, 2021 9:06 pm
surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
Do they all live in Lake Wobegon?
jarjarM
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Re: My personal hedge fund?

Post by jarjarM »

Nate79 wrote: Fri Oct 22, 2021 9:34 pm
Invictus002 wrote: Fri Oct 22, 2021 9:06 pm
surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
Do they all live in Lake Wobegon?
10+ years of bull market will do this. Reminds me of late 90s when friends in college were dropping out to day trade because just buy IPO dot com stocks and one would be up 100-200% easily on a monthly basis. Then... :beer
Invictus002
Posts: 194
Joined: Fri Feb 15, 2019 11:49 am

Re: My personal hedge fund?

Post by Invictus002 »

Nate79 wrote: Fri Oct 22, 2021 9:34 pm
Invictus002 wrote: Fri Oct 22, 2021 9:06 pm
surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
Do they all live in Lake Wobegon?
The people I know, live all over USA, mostly in metro areas of TX, VA, NC, CA, FL, MA, WA etc.
grkmec
Posts: 255
Joined: Wed Jun 22, 2016 8:46 am

Re: My personal hedge fund?

Post by grkmec »

jazzmania wrote: Fri Oct 22, 2021 10:21 am
grkmec wrote: Thu Oct 21, 2021 6:40 am
jazzmania wrote: Thu Oct 21, 2021 12:29 am Say you have a portfolio of $2M. Say you are actively trading stocks and options and your annual income from this -- including dividends and capital gains-- is $200K. Should you create a C corp so you only have to pay 20% in taxes? Your money will keep growing inside the corporation. Say you have a source of W2 income for living expenses and you don't think you will need this money until you retire.
Seems to me you should just create the corporation and move your money there. What am I missing?
This won’t work. A hedge fund is a legal structure, like an LLC or LLP, which are pass through entities. By putting your investments into a such structures does nothing to reduce taxes. If you want to structure something to nearly avoid all taxes as a US Citizen, there is only one way:

1) move to Puerto Rico, become a resident, and start a hedge fund Under ACT 60. This exempts your from capital gains and dividend taxes

The next best option would be to:

2) start a Bermuda insurance company and contribute all investment securities as paid in capital. Run the insurance company in a way where you try to break even on the insurance underwriting and invest the assets like a rock star. Your returns won’t be subject to taxes and will compound tax free. Any short term capital gains will basically be converted to long term capital gains by when you eventually sell the stock of the insurance company. You need to be clever ok how you structure this to remain compliant under the IRS PFIC rules

Finally the lease desirable option would be to renounce your citizenship and get citizenship in a county with no taxes on investment income.

Or you can do what I did — take most of your taxable account money and invest it into commercial real estate and QSBS private equity funds.

Good luck
Thank you, this is very helpful. I've been thinking of moving to Puerto Rico anyway, so this tax thing is a bonus. Are capital gains and dividends tax exempt for all PR residents or only for companies started under ACT 60? If a person has certain unrealized capital gains of $X before they move to PR, and the gains grow to $Y after their move to PR, do they owe federal income taxes on $X, $Y, or ($Y - $X)?
Good questions. I don’t know. My wife won’t let us move to PR, so I haven’t look into this to know all the specifics
surfstar
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Location: Santa Barbara, CA

Re: My personal hedge fund?

Post by surfstar »

Invictus002 wrote: Fri Oct 22, 2021 9:06 pm
surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
I know someone who always wins when they go to Vegas, also!
Maybe we know the same people!!!
hachiko
Posts: 941
Joined: Fri Mar 17, 2017 1:56 pm

Re: My personal hedge fund?

Post by hachiko »

surfstar wrote: Sat Oct 23, 2021 10:28 am
Invictus002 wrote: Fri Oct 22, 2021 9:06 pm
surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
I know someone who always wins when they go to Vegas, also!
Maybe we know the same people!!!
I come home from Vegas with more cash than I left with about 30% of the time. I'm up a good amount of cash from all of my trips to Vegas. I'm "up" about 60% of the time when I go to Vegas including all the comps. I win every time I go to Vegas :)

Also, believe it or not, there are player advantage games in Vegas if you know what rules you're looking for, as long as you actually play correctly, even before taking into account any comps. But you have to put in the time to learn.

I don't see why trading would necessarily be any different.
Made money. Lost money. Learned to stop counting.
Invictus002
Posts: 194
Joined: Fri Feb 15, 2019 11:49 am

Re: My personal hedge fund?

Post by Invictus002 »

hachiko wrote: Sat Oct 23, 2021 11:34 am
surfstar wrote: Sat Oct 23, 2021 10:28 am
Invictus002 wrote: Fri Oct 22, 2021 9:06 pm
surfstar wrote: Fri Oct 22, 2021 12:53 pm Don't worry - if you continue "trading" eventually you'll lose and not have to worry about taxes at all!

I'm sure you're one of the <1% who will continue to be successful in their trading and outperform, though. :D
Is this supposed to be a joke?

I am aware of 100s of people making $250k consistently year after year as retail traders. They are also doctors, engineers, lawyers, accountants, government workers and other professionals in addition to this.
I know someone who always wins when they go to Vegas, also!
Maybe we know the same people!!!
I come home from Vegas with more cash than I left with about 30% of the time. I'm up a good amount of cash from all of my trips to Vegas. I'm "up" about 60% of the time when I go to Vegas including all the comps. I win every time I go to Vegas :)

Also, believe it or not, there are player advantage games in Vegas if you know what rules you're looking for, as long as you actually play correctly, even before taking into account any comps. But you have to put in the time to learn.

I don't see why trading would necessarily be any different.
Very thoughtful, but poor analogy.

I don't want to argue here as its different from Boglehead ideology. I respect all ideas.

If anyone knows how to mitigate taxes on profits from trading, I am interested to learn, other than saying, don't trade or create losses or how trading is for losers or nobody keeps winning etc.
Tanelorn
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Re: My personal hedge fund?

Post by Tanelorn »

Invictus002 wrote: Sat Oct 23, 2021 12:16 pm If anyone knows how to mitigate taxes on profits from trading, I am interested to learn, other than saying, don't trade or create losses or how trading is for losers or nobody keeps winning etc.
opportunity zone investments delay capital gain taxes for 5 years, reduce them by 10%, and if you hold that investment in real estate long enough, it’s tax free both for its gains and its depreciation recapture. There’s a traded partnership OZ that invests in this stuff and you might get similar tax breaks for owning via the K1.

https://belpointeoz.com/wp-content/uplo ... 7.2021.pdf
hvaclorax
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Re: My personal hedge fund?

Post by hvaclorax »

Humblebrag.
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