Portfolio review: rental condo, AMT, ISOs, target date funds

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Topic Author
elmandolk
Posts: 6
Joined: Sat Mar 28, 2020 1:51 pm

Portfolio review: rental condo, AMT, ISOs, target date funds

Post by elmandolk » Sat May 23, 2020 8:38 pm

Overview

Total portfolio size: mid six figures
Emergency funds: ~60k (savings account at 1.25%)

Tax Filing Status: Single
Tax Rate: 35% Federal, ~5% State
Age: 30

Desired allocation:
55% US stock / 35% intl stock / 10% bonds (per VFFVX, the target date fund for my age)

Hello! I’ve been contributing to retirement accounts since I started working -- mostly target date funds. Last year, I opened a taxable account and started investigating the 3-fund portfolio strategy in earnest. I’ve learned a ton reading this site and finally feel like I have enough of a grasp on the concepts to ask for feedback. Some of my questions are about retirement, some about my condo, some about employer equity / taxes. Thanks in advance!
_______________________________________________________________

Rental condo

Debt: rental condo mortgage 520k @ 3.85%
Rental condo value: ~730k

I own a condo in a VHCOL city that I no longer live in but may return to in the future. I’m renting it out at negative $500/month cash flow. That works out to my tenants paying down $400 of my principal each month, and me paying the rest of the principal out of pocket (with their rent covering all other expenses). I manage the property myself. It’s thankfully low maintenance.
_______________________________________________________________

Current retirement assets

Former employer traditional 401k
21% Vanguard Target Retirement 2055 Trust I 1488 (0.04%)

Former employer traditional 401k (match)
19% Vanguard Target Retirement 2055 Trust I 1488 (0.04%)

Former employer Roth 401k
16% Vanguard Target Retirement 2055 Trust I 1488 (0.04%)

Roth IRA
03% Vanguard Target Retirement 2055 Fund VFFVX (0.15%)
02% Vanguard Total Bond Market Index Fund VBTLX (0.05%)
08% Vanguard Total International Stock Index Fund Admiral Shares VTIAX (0.11%)

Taxable
12% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX (0.04%)

Current employer Roth 401k
04% Vanguard Target Retirement 2055 Fund VFFVX (0.15%)

Current employer traditional 401k
13% Vanguard Target Retirement 2055 Fund VFFVX (0.15%)

_______________________________________________________________

Current retirement allocation summary

Same info as above, but collapsed for convenience.

Tax-advantaged accounts - target funds
56% Vanguard Target Retirement 2055 Trust I 1488 (0.04%)
20% Vanguard Target Retirement 2055 Fund VFFVX (0.15%)

Tax-advantaged accounts - manually allocated
08% Vanguard Total International Stock Index Fund Admiral Shares VTIAX (0.11%)
02% Vanguard Total Bond Market Index Fund VBTLX (0.05%)

Taxable - manually allocated
12% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX (0.04%)
_______________________________________________________________

New annual contributions

Max out 401k, no employer match
Max out Roth IRA via backdoor
Maybe ~$20k to taxable? Not sure yet.
_______________________________________________________________

Questions

Meta: Sorry for the verbosity of my questions. I wanted to share my full reasoning on these topics so that if there are any flaws they can be corrected. Please nitpick! Thanks!

1. Target date funds -- At first, I was considering target date funds for all my accounts. But then I read that target date funds aren’t good for taxable accounts. So I put all my taxable assets into equities and sold some target date funds in my Roth IRA to buy bonds to balance out the allocation. To simplify my holdings to just three funds, I was considering moving completely away from target date funds. But then I noticed that my former employer’s plan has a very low expense ratio (0.04%), so I’m considering leaving that as-is, but moving my remaining VFFVX shares (0.15%) to normal index funds with manual allocation for the lower rates. Does that seem reasonable?

2. Condo -- I’m not sure what my plan for the condo should be. I’d been considering selling it next year (the last year I can take advantage of the primary home capital gains exclusion), but with the coronavirus it seems like my opportunity for near-term selling has passed and it might make sense to hold onto it until the market (society?) stabilizes. On the other hand, I have no idea what I’m doing as a rental investor, negative cash flow seems like a bad situation to be in, I don’t want to try to time the market by waiting, etc. My intention when I purchased the condo was to live there for a long while, and I may want to return there in the future. So any words of wisdom or guidance here would be helpful. Is it ok to justify negative cash flow as “my tenants are helping me pay down my mortgage”? Or is that naive?

3. AMT -- I paid 2019 AMT after exercising current employer ISOs. I’ve read that I can use this as a “credit” to offset taxes in subsequent years. What should I do to optimize that for the 2020 tax year? Should I hold off on exercising more options? If there’s a spreadsheet template anyone can recommend for AMT that would be amazing. (Aside: I did all my taxes on my own with TurboTax Pro, figured that for 2019 my tax situation was complicated enough to warrant professional guidance, paid someone else, and they arrived at the same number. I don’t regret it -- the validation of my approach was useful -- but my preference is to DIY things going forward.)

4. Windfall -- I may have (fingers crossed) a windfall from current employer equity in the coming years, likely low-to-mid 7 figures. A goal for me right now is to develop enough discipline/confidence in my ability to manage my assets so that if things work out, I can just put all my earnings into my taxable Vanguard account in stock index funds, balance out my allocation by buying bonds in my tax-advantaged accounts, and carry on with my life. Does that seem reasonable? Should I bite the bullet and plan to pay a professional to help me with this?

5. Emergency fund -- It’s more than I need right now for 6 months, but I’m worried about something happening with the condo requiring a large outlay, eg really hard to find tenants due to quarantine / being in a different city. What do you think?

6. Foreign Tax Credit -- Currently my taxable account is all US stocks, and the manual allocation of bonds and intl stocks is my Roth IRA. Is that the most tax-efficient approach? Am I missing out on eg foreign tax credit from intl stocks?

7. Treatment of Roth vs traditional 401k -- I've sometimes considered "discounting" the value of my traditional 401k by the expected tax I'll need to pay on it -- ie when making allocation decisions or just holistically trying to understand my net worth. Is that something people do? Or is it all just "the same money" until it's time to withdraw? Is there anything I would do differently with money in a Roth vs traditional 401k?

8. Is there anything I should be thinking about?

Partial answers to any of these would be useful! Thanks! :sharebeer

retired@50
Posts: 3049
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Location: Living in the U.S.A.

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by retired@50 » Sun May 24, 2020 9:20 am

elmandolk wrote:
Sat May 23, 2020 8:38 pm

Partial answers to any of these would be useful! Thanks! :sharebeer
After reading your post a few thoughts come to mind.

Target date funds are great, especially if you can get them with a .04% expense ratio. The use of target date funds in all account types can create minor inefficiencies. Since target date funds hold bonds, using them in a taxable account or a Roth account is not optimal. It's also not a big mistake. If you truly want simplicity, sticking with target date funds for your lifetime would certainly lead to a decent outcome.

If you decide to "de-construct" your target date funds and hold the individual components, US Stock, International Stock, US Bonds, International bonds, then you've got to decide what assets should be held where... This can lead to errors and complications, but it can be done. The general rule is to hold your bonds inside the tax-deferred / traditional 401k. Then, use Roth and taxable space for US Stocks and International Stocks.

Holding international stock in taxable and using the foreign tax credit is fine, but it's certainly not required. It will slightly complicate your tax return, so if you don't prepare your own taxes, you'll need to know enough to tell if your tax preparer is doing it properly. Don't expect some sort of huge windfall just because you hold international stock in your taxable account.

Regarding the condo. Subsidizing the rent of the current tenant isn't ideal, as you know. Rationalizing it with the "help with the mortgage" doesn't make business sense. If you have some sort of sentimental attachment to the condo, then I suppose you could keep it, but a rational real estate investor would walk away. If you keep the condo, having a larger emergency fund is smart. What if the association calls for a one-time contribution to the common maintenance fund for a new roof. You don't want to be in a position to have to sell stock to keep the money-losing condo afloat.

Regarding the potential windfall from the employer. Managing a $500,000 portfolio doesn't have to be any different than managing a $10 million dollar portfolio. Use low-expense ratio, broadly diversified stock and bond index funds that represent the "total market" for either US stocks, International stocks, US bonds, or International bonds. If you wind up with more than 4 mutual funds plus a money market fund, then you could be doing it simpler.

A few links that you might find helpful.
tax efficient fund placement: https://www.bogleheads.org/wiki/Tax-eff ... _placement
Traditional 401k or Roth 401k: https://www.bogleheads.org/wiki/Traditional_versus_Roth

Regards,
This is one person's opinion. Nothing more.

kxl19
Posts: 79
Joined: Wed Mar 13, 2013 12:41 am

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by kxl19 » Sun May 24, 2020 10:27 am

Regarding AMT, I've found the following two helpful in guiding your decision making on how many shares to exercise: Generally, the idea is to exercise up to the AMT exclusion limit.

1 - AMT Calculator: https://github.com/lambtron/amt-calculator, and there's a corresponding website

2 - The Personal Finance Toolkit (Excel file) that has a 1040 simulator including the AMT forms https://www.bogleheads.org/wiki/Tools_and_calculators. Modify the sheet for your # of shares to exercise, strike & estimated market price, and you'll calculate the AMT impact.

Depending on how deep in the money your options are, the upfront amount, and your risk tolerance, it may make sense to exercise and hold the shares for 1 year to get LTCG instead of the 35% income tax you'd pay on exercise & immediate sell.

milktoast
Posts: 245
Joined: Wed Jul 10, 2019 8:17 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by milktoast » Sun May 24, 2020 1:40 pm

Frankly with AMT, it’s a bit of a crap shoot. Better now that they changed the rules a little. But don’t let AMT change your ISO strategy (beyond being sure to have enough cash for taxes).

If you use TurboTax , the credit will roll forward and be applied automatically.

Topic Author
elmandolk
Posts: 6
Joined: Sat Mar 28, 2020 1:51 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by elmandolk » Sun May 24, 2020 9:29 pm

Thanks for the replies.

retired@50:
Since target date funds hold bonds, using them in a taxable account or a Roth account is not optimal.
Interesting. I'd been aware of the bonds being suboptimal in taxable accounts because they generate taxable income. Reading your comment, I surmise that bonds are suboptimal in a Roth account for a different reason -- the expected returns are lower than stocks, so they take less advantage of the Roth tax-free gains that would stocks. Is that right?
The general rule is to hold your bonds inside the tax-deferred / traditional 401k. Then, use Roth and taxable space for US Stocks and International Stocks.
From what I can tell, the retirement account UIs for my 401ks don't allow me to choose the allocations for Roth vs traditional separately. Do you happen to know if that's standard? I can reach out to my account admins. If that's the case, I'll probably just leave things in the target date fund and accept these minor tax inefficiencies.
Don't expect some sort of huge windfall just because you hold international stock in your taxable account.
Makes sense, thanks for confirming!
Rationalizing it with the "help with the mortgage" doesn't make business sense.
Sigh. Definitely it has sentimental value. I will think more about this.

kxl19:

Those AMT forms look to be exactly what I need, thanks!
Generally, the idea is to exercise up to the AMT exclusion limit.
it may make sense to exercise and hold the shares for 1 year to get LTCG instead of the 35% income tax you'd pay on exercise & immediate sell
+1. My exercise last year was motivated by wanting a lower "fair-market value minus strike price paper windfall" on which to own taxes, and also to start the ticker for LTCG earlier. I didn't think through the AMT implications in as much detail as perhaps I should have.

My understanding is that I can use 2019 AMT payment to offset normal taxes in a tax year when normal taxes exceed AMT. I'm wondering if there are specific things I can/should do to optimize that delta. Perhaps _not_ exercising this year is one?

milktoast:
Frankly with AMT, it’s a bit of a crap shoot
That's both comforting (since last year I treated it like that anyway) and also unsettling (since I was hoping to right my wrongs with more discipline this year lol).

Thanks again!

kxl19
Posts: 79
Joined: Wed Mar 13, 2013 12:41 am

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by kxl19 » Sun May 24, 2020 11:04 pm

My understanding is that I can use 2019 AMT payment to offset normal taxes in a tax year when normal taxes exceed AMT. I'm wondering if there are specific things I can/should do to optimize that delta. Perhaps _not_ exercising this year is one?
Yes, this is true, however, I'm guessing you'll have a batch of options maturing every year. Depending on the # of options and the difference between strike & market, and your exercise decisions, there's some possibility you won't have any year where your normal > AMT, unless you move jobs, quit, etc.

One strategy I've seen is people exercising every other year to "recoup" the AMT credit.

I'm in a similar situation where the delta is large, and I'll be in AMT zone for every year. After much research here, I've chosen to pay AMT (it's just 25-28% on the delta between normal and AMT), but that's at least less than paying income-level tax rates (35%+) for the exercise & sell. Goal is to get 1 year LTCG and then diversifying.

I think it's a great idea to convert your newfound equity (ISO exericse, windfall, etc) into some type of bond / CD position. In your tax bracket, I'd recommend looking into muni's. Higher tax-equivalent yield, and the credit rating of them is higher than corporate bonds. I'm doing 50% treasuries (pre-corona)/CDs + 50% intermediate term muni (VWIUX).

retired@50
Posts: 3049
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by retired@50 » Sun May 24, 2020 11:34 pm

elmandolk wrote:
Sun May 24, 2020 9:29 pm
Thanks for the replies.

retired@50:
Since target date funds hold bonds, using them in a taxable account or a Roth account is not optimal.
Interesting. I'd been aware of the bonds being suboptimal in taxable accounts because they generate taxable income. Reading your comment, I surmise that bonds are suboptimal in a Roth account for a different reason -- the expected returns are lower than stocks, so they take less advantage of the Roth tax-free gains that would stocks. Is that right? <--Yes.
The general rule is to hold your bonds inside the tax-deferred / traditional 401k. Then, use Roth and taxable space for US Stocks and International Stocks.
From what I can tell, the retirement account UIs for my 401ks don't allow me to choose the allocations for Roth vs traditional separately. Do you happen to know if that's standard? I can reach out to my account admins. If that's the case, I'll probably just leave things in the target date fund and accept these minor tax inefficiencies.

Since you're in a high tax bracket, it seems like you should be using a Traditional 401k, not a Roth 401k. See wiki link for more on this important decision that so many people seem to misunderstand. https://www.bogleheads.org/wiki/Traditional_versus_Roth
Don't expect some sort of huge windfall just because you hold international stock in your taxable account.
Makes sense, thanks for confirming!
Rationalizing it with the "help with the mortgage" doesn't make business sense.
Sigh. Definitely it has sentimental value. I will think more about this.

See my answers above in blue.

Regards,
This is one person's opinion. Nothing more.

Topic Author
elmandolk
Posts: 6
Joined: Sat Mar 28, 2020 1:51 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by elmandolk » Mon May 25, 2020 1:56 pm

I'm in a similar situation where the delta is large, and I'll be in AMT zone for every year. After much research here, I've chosen to pay AMT (it's just 25-28% on the delta between normal and AMT), but that's at least less than paying income-level tax rates (35%+) for the exercise & sell.
Makes sense. I suspect eating the AMT will save me money longer-term so may follow your course. I need to play around with the links you've shared.

I'm having trouble confirming this online, but my understanding is that the AMT carryover has no expiration so could be used in a future year eg in retirement or between jobs. (Although who knows what tax laws will be.) Is that right? Are you planning to use yours eventually?
I think it's a great idea to convert your newfound equity (ISO exericse, windfall, etc) into some type of bond / CD position.
Any reason to do this in particular instead of just considering it part of the broader portfolio and allocating accordingly? (Feels safer, that's for sure.)
Since you're in a high tax bracket, it seems like you should be using a Traditional 401k, not a Roth 401k. See wiki link for more on this important decision that so many people seem to misunderstand. https://www.bogleheads.org/wiki/Traditional_versus_Roth
Thanks for highlighting this! My motivation for Roth was something along the lines of "because after-tax money is worth more than pre-tax money, Roth accounts effectively allow you to contribute more than Traditional accounts" as the wiki says. But the example showing that the fair comparison is not to "spending the money" but rather "investing in a taxable account" makes is clear my current strategy is suboptimal. :shock:

I have changed my contributions to traditional and increased deposits into my taxable account accordingly.

milktoast
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Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by milktoast » Mon May 25, 2020 2:03 pm

I probably should not have been so flippant.

It is possible to calculate exactly where the AMT crossover is and exercise to that point. A pretty good way to do this is just use last years TurboTax return and adjust the numbers manually and see where the crossover happens. I have done this multiple times to ensure I can cover the extra taxes.

But... in the three circumstances where I was dealing with significant ISO, the monthly volatility on the stock (which was turned into much larger volatility in option value) was much higher than the difference between various tax rules on the gains.

If you are in one of those situations, timing the exercise and sale to maximize value is much more important than minimizing taxes - especially since AMT from ISO timing results in a credit that you get back over time. With the new tax laws, you get it back much faster than under the old system.

[Edit: BTW. Don't forget about disqualifying disposition. That can save your house in a falling market. Exercise and hold ISO in early January, you can disqualify all the way up until late December. And if the market doesn't plunge, you can meet the year holding period and still sell before taxes are due - 15 months later. But if you exercise and hold in December, the AMT taxes are due only 4 months later. The best financial decision of my life was to disqualify a million dollars in ISO exercise by selling for $100k. Saved the house.]

Topic Author
elmandolk
Posts: 6
Joined: Sat Mar 28, 2020 1:51 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by elmandolk » Mon May 25, 2020 3:05 pm

A pretty good way to do this is just use last years TurboTax return and adjust the numbers manually and see where the crossover happens. I have done this multiple times to ensure I can cover the extra taxes.
Good to know this is a viable option. I'll play around.

Aside: I'm going to double down on TurboTax going forward. For 2019 I had a professional do my taxes, so I guess I'll have to manually enter some data back in TT -- but from the previous 10 years everything is in TurboTax. I like the simplicity of having everything in one place across multiple years, and being able to dig in and DIY as needed. Perhaps a better topic for another thread, but I'm curious if anyone's bumped up against concrete/unavoidable limitations with Turbotax for personal taxes. I had an LLC last year and couldn't do its 1065/K-1s with the online version, but for personal taxes it seems sufficient for the long haul.
the monthly volatility on the stock (which was turned into much larger volatility in option value) was much higher than the difference between various tax rules on the gains.
Don't forget about disqualifying disposition
Thanks. My employeer is pre-IPO, so selling isn't a factor for me yet, barring a tender offer or something. My motivation in exercising now is to increase the % of my windfall taxed as LTCG instead of income. Also worth noting that I've also only exercised a portion of my options. On paper, they're in the money. But you never know.

kxl19
Posts: 79
Joined: Wed Mar 13, 2013 12:41 am

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by kxl19 » Mon May 25, 2020 3:07 pm

elmandolk wrote:
Mon May 25, 2020 1:56 pm
I'm having trouble confirming this online, but my understanding is that the AMT carryover has no expiration so could be used in a future year eg in retirement or between jobs. (Although who knows what tax laws will be.) Is that right? Are you planning to use yours eventually?
Yes - I believe that's the case, you'll have to search, there are AMT threads on this here.
Any reason to do this in particular instead of just considering it part of the broader portfolio and allocating accordingly? (Feels safer, that's for sure.)
I have been roughly reallocating into the broader portfolio, but if the windfall is significantly large, you can consider that you've "won the game" and there's less need to be as aggressive on growth. And it avoid the "loss aversion". I might be slightly biased because I was reallocating my ISOs right before covid, and have a bit of regret. Also another upside - your fixed income portfolio could generate enough income to fund your future ISO exercises. =)
Thanks. My employeer is pre-IPO, so selling isn't a factor for me yet, barring a tender offer or something. My motivation in exercising now is to increase the % of my windfall taxed as LTCG instead of income. Also worth noting that I've also only exercised a portion of my options. On paper, they're in the money. But you never know.
If you're pre-IPO, the strike is low, and you're OK with the amounts required to exercise, and you see a clear IPO path, I highly recommend exercising your ISOs. It'll minimize the pain once the IPO goes through since the delta will get even bigger if it's a successful IPO. Even more awesome is if you can find out if your firm would qualify for Section 1202 Qualified Small Business Stock exemption, which is 0% cap gains if shares are held >= 5 years. I have a few posts on this. In this case, you'd want to exercise up to the limit before the IPO, and hopefully the IPO happens ~ 5 years since first exercise. You might have a window of insight when the company publically announces the IPO, and then maximize your ISO exercises in that window. That'll also reduce the AMT amount since the delta will jump in the ISO.

kxl19
Posts: 79
Joined: Wed Mar 13, 2013 12:41 am

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by kxl19 » Mon May 25, 2020 3:11 pm

milktoast wrote:
Mon May 25, 2020 2:03 pm
[Edit: BTW. Don't forget about disqualifying disposition. That can save your house in a falling market. Exercise and hold ISO in early January, you can disqualify all the way up until late December. And if the market doesn't plunge, you can meet the year holding period and still sell before taxes are due - 15 months later. But if you exercise and hold in December, the AMT taxes are due only 4 months later. The best financial decision of my life was to disqualify a million dollars in ISO exercise by selling for $100k. Saved the house.]
I'm curious why you did this? Is it because the price fell towards the end of the year, and you would have otherwise had $1m in AMT phantom income, but the stock held was only worth $100k?

milktoast
Posts: 245
Joined: Wed Jul 10, 2019 8:17 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by milktoast » Mon May 25, 2020 3:22 pm

kxl19 wrote:
Mon May 25, 2020 3:11 pm
milktoast wrote:
Mon May 25, 2020 2:03 pm
[Edit: BTW. Don't forget about disqualifying disposition. That can save your house in a falling market. Exercise and hold ISO in early January, you can disqualify all the way up until late December. And if the market doesn't plunge, you can meet the year holding period and still sell before taxes are due - 15 months later. But if you exercise and hold in December, the AMT taxes are due only 4 months later. The best financial decision of my life was to disqualify a million dollars in ISO exercise by selling for $100k. Saved the house.]
I'm curious why you did this? Is it because the price fell towards the end of the year, and you would have otherwise had $1m in AMT phantom income, but the stock held was only worth $100k?
Yes. ISO in one of the hottest tech IPO of very early 2000. By the time the stock was released from six month lockout, it had cratered. If I had not disqualified, I would have $100k in stock and $250k in AMT tax bill.

Topic Author
elmandolk
Posts: 6
Joined: Sat Mar 28, 2020 1:51 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by elmandolk » Mon May 25, 2020 5:35 pm

If you're pre-IPO, the strike is low, and you're OK with the amounts required to exercise, and you see a clear IPO path, I highly recommend exercising your ISOs.
Thanks for calling this out. After you've exercised ISOs, how do you value illiquid stock in the context of your broader portfolio? I've read some folks suggest "value it at zero until IPO". But that seems overly conservative. Right now, FMV is about 6x my lowest strike price. I've exercised about 45% of what's vested. Here's how I'm thinking about exercising:

Reasons to exercise:

1. Immediate 6x return (on paper), with a lot of remaining upside potential for IPO (imo, based on incumbent valuations)
2. Pay LTCG instead of personal income tax on greater portion of final sale (35% vs 15% or 20% depending how I space things out)

Reasons not to exercise:

3. Opportunity cost of putting money into taxable investments now
4. Risk of bankruptcy / down round / down IPOs / down sale
5. Reduced diversification, ie "all my eggs in one basket" (maybe this is just a subpoint of the previous point)
6. Money is locked up

Anything else to consider?

Now that I'm thinking about this a little more rigorously: I suppose if I valued illiquid stock at FMV, it would be rational for me to exercise since I would increase my portfolio overnight by exercising. The reason not to do that would be if 3-6 outweigh 1-2, and the discount from these factors tilts the scales toward leaving the money in a taxable account, perhaps with a medium-term time horizon so I can use it to exercise in a few years. Looking at this list right now, based on my forecasts it seems I should be exercising more this year, potentially a lot more.

The unsettling thing to me about all this is that the "best practice" feels less cut-and-dry than with typical Boglehead strategies. There's more idiosyncrasy, which means there's more opportunity for me to mess things up lol. But maybe everyone feels this way about the particulars of their situation lol. In any case, thanks for your insight :)
Qualified Small Business Stock
I think I joined too late for this, but I will take a look. Thanks!

kxl19
Posts: 79
Joined: Wed Mar 13, 2013 12:41 am

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by kxl19 » Mon May 25, 2020 6:31 pm

elmandolk wrote:
Mon May 25, 2020 5:35 pm

Thanks for calling this out. After you've exercised ISOs, how do you value illiquid stock in the context of your broader portfolio? I've read some folks suggest "value it at zero until IPO". But that seems overly conservative. Right now, FMV is about 6x my lowest strike price. I've exercised about 45% of what's vested. Here's how I'm thinking about exercising:
Safest bet is value it zero and don't count it towards your overall portfolio. Also - if the $ needed to exercise is trivial to your overall net worth , I wouldn't worry too much about it, but just know it could be $0 or it could be $1m.

If you really want to attach a value, assume some probability of an IPO or trade-sale. Look at comps of companies in your sector at similar stages to get an idea of the valuation, and attach some probability to it. Similarly, you can find out what % of the company you own, and go from there. YOur company should also have an annual valuation that's required for accounting purposes, that's used to calculate the FMV for your AMT calculations.

I've also heard an accountant make an argument that the FMV for illiqiud options is "zero", (despite the annual valuation), and used this as a way to argue out of not paying the phantom AMT income when exercising ISOs for a company that's still private. I have never done this.

elmandolk wrote:
Mon May 25, 2020 5:35 pm
Qualified Small Business Stock
I think I joined too late for this, but I will take a look. Thanks!
Definitely worth looking into further if you qualify, the biggest restriction is likely that the company has never had > $50m assets, so if they did a big VC round >$50m, then you're too late. If you do qualify, and you have an IPO/tradesale, you instantly have an effectively large taxfree account like a Roth.

Topic Author
elmandolk
Posts: 6
Joined: Sat Mar 28, 2020 1:51 pm

Re: Portfolio review: rental condo, AMT, ISOs, target date funds

Post by elmandolk » Tue May 26, 2020 8:22 pm

I think I have what I need -- thanks again for all the great feedback!

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