Minimizing Taxes of Highly Appreciated Assets

Blaine Bowers |

Minimizing Taxes of Highly Appreciated Assets

If the value of your stocks, bonds, or other capital investments has increased substantially, steps that can be taken to minimize taxation include:


Timing the sale of assets is important

Generally, you can choose when to sell your investments, potentially shifting taxes owed. Therefore, if your capital assets have appreciated substantially, you can control when you recognize the profit (capital gain) on these investments.

If you are in a high tax bracket, you may want to hold on to your highly appreciated investments for longer than 12 months in order to get favorable long-term capital gains tax treatment.

The American Taxpayer Relief Act of 2012 made permanent long-term capital gains rates that range from 0% for individuals in the 10% and 15% marginal income tax brackets to a 20% rate for taxpayers in the top marginal tax bracket of 39.6%.

By contrast, because short-term capital gains are taxed as ordinary income, the top short-term capital gains tax rate can be 39.6% (or more if you're subject to a 3.8% Medicare contribution tax).

As you can see, a little patience can pay off handsomely.

Moreover, if you expect to have substantial tax deductions 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

It is possible to minimize taxation of your capital gain income by using capital losses effectively; you can generate capital losses to offset capital gains, and you can use your capital gain income to utilize unused losses.

Capital losses must be netted against capital gains in a specific manner. Excess losses may 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 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.


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 to the extent that it does not exceed 30 percent of your adjusted gross income. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.

You stand to benefit from charitable gifting 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 wish to donate highly appreciated assets to charity, it is important to apprise yourself of all relevant rules and to keep in mind that certain types of property may be more advantageous to donate to charity than others.


Passing assets to heirs; is it better to gift highly appreciated assets during your lifetime or to pass them to others at death?


Property that has already appreciated substantially may not be the best candidate for a lifetime transfer or gift. That is because the recipient of a gift takes a carryover basis in the property; that is, the recipient's basis in the property is the same as your basis was.

In contrast, the basis of property passed at your death is generally stepped up (or down) to its fair market value (FMV) at the time of your death.

Additionally, you may not want to give highly appreciated property if the donee will recognize a substantial capital gain when the property is sold.


Example: Gary pays $1,000 for stock in XYZ Company. Gary gives the stock to Ron as a birthday present. After several years, Ron sells the stock for $10,000.

Since Ron is in a higher marginal tax bracket (35 percent) than Gary (who is in the 15 percent tax bracket), Ron will pay income tax at the 15 percent capital gains tax rate on the $9,000 gain ($10,000 - $1,000), whereas Gary would have paid no income tax because of the 0 percent capital gains tax rate.

On the other hand, you may want to make that gift if the sale of the property is imminent anyway and the donee is in a lower tax bracket.

Example: Ron pays $1,000 for stock in XYZ Company. Ron gives the stock to Gary as a birthday present. After several years, Gary sells the stock for $10,000.

Since Gary is in a lower marginal tax bracket (15 percent) than Ron (who is in the 35 percent tax bracket), Gary will pay no income tax (because of the 0 percent rate) on the $9,000 gain ($10,000 - $1,000), whereas Ron would have paid income tax at the 15 percent capital gains tax rate.

You (the donor) may increase the basis of appreciated property by the portion of any federal gift and generation-skipping transfer taxes you pay that are attributable to the appreciation element.

Since the donee takes a carryover basis, the capital gain recognized by the donee will be less than it would have been without the adjustment. It is not possible to increase the basis of the property any higher than the property's fair market value on the date of the gift.

Remember, you can currently make federal tax-free gifts of $14,000 per recipient under the annual gift tax exclusion. If you exceed this amount, you may owe gift tax, however, gift tax owed may be offset by your applicable exclusion amount to the extent that is available.


Working with a CFP® can be especially helpful as you implement your comprehensive financial plan.  A CFP® can help you to coordinate with other professionals (CPA's, Attorney's, etc.) to design and implement your plan.

Please contact me with any questions that you have about your individual situation. 


Neither Blaine Bowers or The Strategic Financial Alliance, Inc. provide tax or legal advice