TLH questioning

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

TLH questioning

Post by AZK »

The more I read on this site, the more I learn.

I was thinking about doing some TLH on my taxable portion of my portfolio.. a few questions first.

1) I've read about wash sale rules, a search of the forum turns up some conversation about what works and what doesn't. Does anyone see anything particularly wrong with any of my following substitutions?

IJS -> VBR
JKG -> VO
SPY -> VTI...would VVI be too much?

EFA/EPP/EWJ -> VEU
EEM-> VWO
(I'll soon be adding VSS to my portfolio, when TLH in the future is GWX suitable?

2) All of the examples listed mention selling for a loss and rebuying putting the TLH towards current capital gains and the remainder $3k/year until you harvest your whole loss. But hypothetically, if you had a massive capital gains looming for another stock, would you ever deliberately sell it, and rebuy it and use up your TLH "credit" to offset the future capital gains that you would inevitably pay? This doesn't count as a wash sale right? For example, I inherited 2 mutual funds and 1 stock from a relative. The 2 funds are down significant and I would like to sell to TLH and they don't really fit in my AA and have high ERs so I see no reason to hold on to them. The one stock is up about 4000% (bought decades ago). So I know that I will inevitably have to pay capital gains on it at some point. I was wondering if it makes sense to start chipping away at it now little by little.

FWIW, I am in the 25% tax bracket now, but 3 years from now will most likely be in the highest...
livesoft
Posts: 85971
Joined: Thu Mar 01, 2007 7:00 pm

Post by livesoft »

For a fund up 4000%, I suggest you start chipping away by giving shares to charity.

You chosen replacement shares seem just fine with me.

While I would sell all losers right away, I would not realize gains without careful thought to my plan.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Post by DSInvestor »

When did you inherit the stock that is up 4000%? Are you able to step up the basis? If the basis can be stepped up, you may not have a large unrealized gain.
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Post by AZK »

Well, it was in an account that my mother was custodian of, but technically it became mine when I was 21. It has been essentially untouched until now.

What's the best way to reduce the tax burdern of selling it when I need it (i.e. in 3 years or so when I buy a house)...

If you mean step up the basis I assume you mean, rebuy as much of it at it's current price to reduce my eventual capital gain when I sell everything? That sort of fit into what I was thinking about the TLH question, trying to take huge losses, and instead cash in the stock and rebuy it now?
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Post by DSInvestor »

From investopedia:
http://www.investopedia.com/terms/s/stepupinbasis.asp
Investopedia wrote:Investopedia explains Step-Up In Basis
In most cases, when an asset is passed on to a beneficiary, its value is more than what it was when the original owner acquired it. The asset therefore receives a step-up in basis so that the beneficiary's capital gains tax is minimized - because it is not based on the increase in value from the original purchase price. For example, say your uncle purchased some shares at $2 in 1968 and he left them to you upon his death, at which time the shares are $15. For tax purposes, the shares would receive a step-up in basis, meaning your cost basis for the shares would become the current market price of $15. So, any capital gains tax you pay in the future will be based on the $15, not on the original purchase price of $2.
bold = my emphasis

I don't think step up basis applies for an investment in a custodial account that became yours at age 21.
sscritic
Posts: 21853
Joined: Thu Sep 06, 2007 8:36 am

Post by sscritic »

AZK wrote:Well, it was in an account that my mother was custodian of, but technically it became mine when I was 21.
If it was in a UGMA, it technically and legally became yours the day the stock was bought, even if you were only two. A custodian is not an owner; a custodian is someone like a trustee that has custody of someone else's property. Your mother was the custodian, but you were the someone else who owned the property. A minor cannot enter contracts, but can own property. The custodian enters into contracts on behalf of the minor,, e.g., opens a CD, but is not the owner.
User avatar
grabiner
Advisory Board
Posts: 35265
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Post by grabiner »

AZK wrote:Well, it was in an account that my mother was custodian of, but technically it became mine when I was 21. It has been essentially untouched until now.

What's the best way to reduce the tax burdern of selling it when I need it (i.e. in 3 years or so when I buy a house)...
Since long-term gains are taxed at a fixed rate, there is no tax cost in waiting to sell it all at once (when you need it, or at the end of 2012 if capital-gains tax rates go back up in 2013). You'll lose 15% of your gains to taxes, plus any state tax.

You might want to time your sales in a year that the gain doesn't affect tax phase-outs; if the capital gain would increase your adjusted gross income enough to cost you the child tax credit, you will pay less in tax if you wait to take the gain in another year in which you have no child tax credit.

However, you may want to sell the stock sooner if it is a large part (say, more than 5%) of your portfolio, because it represents an unnecessary risk. If the stock is 10% of your portfolio, it's better to sell now and invest 8.5% of your portfolio in something more appropriate than to hold the stock for three more years and risk it dropping to 1% of your portfolio.
Wiki David Grabiner
User avatar
grabiner
Advisory Board
Posts: 35265
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: TLH questioning

Post by grabiner »

AZK wrote:2) All of the examples listed mention selling for a loss and rebuying putting the TLH towards current capital gains and the remainder $3k/year until you harvest your whole loss. But hypothetically, if you had a massive capital gains looming for another stock, would you ever deliberately sell it, and rebuy it and use up your TLH "credit" to offset the future capital gains that you would inevitably pay?
There is no point in doing this. If you have a $30,000 capital loss and an unrealized $30,000 capital gain, you can realize the gain and pay no tax, or you can wait to realize the gain and take $3000 a year off your ordinary income. Any unused losses will offset the gain on the stock when you finally sell it; if you sell in five years, you have reduced your ordinary income by $15,000 (saving $3750 in a 25% bracket) and have $15,000 more in capital gains (costing $2250).

You might take advantage of the tax situation to realize your huge gain with no tax cost if you want to sell the stock anyway. (Even then, you might as well wait until January 1 to take $3000 off this year's taxes.)
Wiki David Grabiner
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Post by DSInvestor »

How close are you to the 15% tax bracket? If you're not maxing out Traditional 401k or 403b for 16.5K per year, would maxing out bring you into the 15% tax bracket? I mention this because LT capital gains that fall in the 15% tax bracket or lower are taxed at 0% Fed. I believe this 0% tax rate is available for 2010, 2011 and 2012.

LTCG that falls in the 25% bracket or higher is taxed at 15% Fed.
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Post by AZK »

Unfortunately both my wife and I are maxing out our 403b but are still within in the 25% bracket. I don't think there is any way we can get lower...
Topic Author
AZK
Posts: 52
Joined: Tue Dec 07, 2010 9:49 am

Post by AZK »

Also, if you are frequently TLH + add new money + rebalance, how do you track the long term performance of your portfolio?
livesoft
Posts: 85971
Joined: Thu Mar 01, 2007 7:00 pm

Post by livesoft »

AZK wrote:Also, if you are frequently TLH + add new money + rebalance, how do you track the long term performance of your portfolio?
You have to use software. I use MSMoney which is now freely available. Others pay to use Quicken or they buy MS Excel and build their own spreadsheet to do the tracking.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Post by dbr »

AZK wrote:Also, if you are frequently TLH + add new money + rebalance, how do you track the long term performance of your portfolio?
If you want a measure of return that can be computed in the presence of contributions and withdrawals to/from a fund you can calculate internal rate of return. In Excel it is the function XIRR.
User avatar
House Blend
Posts: 4877
Joined: Fri May 04, 2007 1:02 pm

Post by House Blend »

AZK wrote:Also, if you are frequently TLH+ add new money + rebalance, how do you track the long term performance of your portfolio?
An interesting extra complication in portfolio tracking is the value of capital losses. If Alice has $100K in a taxable account with a cost basis of $50K, this is clearly less valuable than Bob's account, which has a balance of $100K and a cost basis of $150K (or a basis of $100K along with $50K in carryover losses).

I don't think it's worth the bother to try to precisely quantify the present value of capital gains/losses--good luck trying to predict how much tax will be paid on future sales. But they clearly have an effect on the bottom line, and we all have to track them in any case.
Post Reply