You might be an early employee at Microsoft, a successful real estate investor, or the owner of a small business that has taken off. In each case, you took a different path, but in the end, you own something worth a lot more than when you first acquired it. Now you’re staring down a large capital gain tax bill if you sell. Are you just stuck or is there anything you can do?
In this series, we’ll discuss strategies to minimize taxes and maximize the impact of your highly appreciated asset in the following editions:
- Taxes & Highly Appreciated Stock
- Taxes & Highly Appreciated Real Estate
- Taxes & Highly Appreciated Business Ownership
But first, let’s discuss why this is an issue worth considering and cover a few planning questions that apply across the board.
Isn’t a highly appreciated asset a good thing?
A highly appreciated asset is a great thing! It means that, at some point, you purchased something for much less than it’s worth today. So, what’s the issue? That gain also means you’ll have a tax bill to deal with when you sell. In 2023, the following capital gain tax rates apply based on your taxable income:
- If you’re single
- Up to $41,675: 0%
- $41,676 – 459,750: 15%
- Over $459,750: 20%
- If you’re married
- Less than $83,350: 0%
- $83,351 – $517,200: 15%
- More than $517,200: 20%
With income of $1,000,000 and a $500,000 capital gain, you’d send $100,000 to Uncle Sam when you sell. To make things worse, you might face additional state capital gain taxes or a 3.8% Medicare surtax, which could drive this rate even higher. Seems worth considering, right?
What’s my goal with this asset?
Regardless of what kind of asset you have, we should think first about the job you want it to do for you. As comprehensive advisors, this is always our first question. We generally see some combination of three goals.
- Support me and my family while I’m alive. You want to make sure this asset can pay you income at some point during your life, whether from distributions, dividends, rent, or other proceeds.
- Provide for my family or other heirs after my death. You may not use it during your life, but you want to make sure it helps your loved ones reach their goals.
- Maximize impact on causes I care about. You want this asset to make an impact on charitable organizations that are important to you. You may or may not need this asset while you’re alive.
How much gain do I have in this asset?
This might seem like a strange question at first…isn’t that why we’re having this discussion? But here’s why this is an important question. There are lots of very valuable assets that aren’t highly appreciated. We meet with tech company executives who regularly have $1 million or more in company stock – very valuable – but while some purchased that stock at a low price and have watched it grow for years, others recently acquired it as part of a bonus or acquisition deal and may not have much growth yet..
Once you know your gain, you can calculate the potential loss to taxes, which helps decide the lengths you’re willing to go to reduce or eliminate that burden. The less you lose to taxes, the more you have to apply to goals.
Want to take a deeper dive?
We’ve laid a basic framework for highly appreciated assets in your financial planning. Now, you can take a deeper dive into the specifics related to publicly traded stock, real estate, and private business ownership, depending on which applies to you. We hope you’re able to use these resources to maximize the impact of those assets you’ve worked so hard to build!
About the Author
Zach graduated from Gonzaga University with degrees in Marketing and Finance. While growing up, Zach heard stories from his grandfather about his work as an insurance agent, and other stories from his dad who was an investment manager. They both spoke financial “languages” but had completely different dialects. Recognizing the breadth of the financial vocabulary ultimately led to Zach’s passion for financial planning. He credits his family for this enthusiasm. Zach sees his time with clients as an opportunity to translate all of the different – and often confusing – information they’ve heard and provide clear guidance for each unique situation.
Zach enjoys working with people – his clients – who also appreciate that their financial decisions have an impact not just on themselves, but also on their families, charities and their own life legacy. Many of Zach’s clients have a strong desire to “make a difference”, and they rely on his financial expertise to magnify their philanthropic goals.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.