capital gains - avoid

[james22]

My elderly father has several million of 3M in taxable.

 

I'm convinced it is ~20% overvalued:

 

 

Yes, 3M is (grossly) overvalued beyond any reasonable doubt.

 

https://seekingalpha.com/article/413253 ... ke-mistake

 

3M Is Overvalued.

 

https://seekingalpha.com/article/413241 ... ter-prices

 

 Using several valuation models, I find that 3M’s stock price is overvalued...

 

https://seekingalpha.com/article/413013 ... gs-bargain

 

 ... 3M's stratospheric valuation.

 

https://seekingalpha.com/article/412728 ... may-coming

 

 

What to do about it?

 

I'd shift to (fairly valued) BRK, but selling will incur a 20% LTCG tax (the +3.8% has gone away, yes?).

 

Should I consider the overvaluation to make the tax "free"? Or does the tax make the overvaluation "free"?

 

Bearing in mind step-up basis would allow later selling without any tax hit, any thoughts?

 

Thanks.

[scorpioncapital]

The joys of living in a country that taxes capital gains (some don't at all) :)

I would not let tax considerations determine the optimal investment choice.

But one should ask how sure one is of what one believes.

 

[james22]

1. The 3.8% surcharge still exists,

 

2. My father had not changed his state of residence as I believed, so still subject to state taxation, and

 

3. would trigger IRMAA Medicare surcharge.

 

We'll be holding 3M a while longer...

[Cardboard]

Could selling short term, slightly out of the money covered call be an option?

 

It would generate income which could be seen as an offset to the eventual taxes on capital gains. And if the stock rallies above the strike price and the stock is called away, this gain on the rally could also be considered as an offset?

 

Since I don't sense an urgency to sell and little upward potential maybe this could work?

 

Cardboard

[Gamecock-YT]

Charitable remainder trust

[bookie71]

No easy answer, but remember that when he passes you will get a step up in basis. How is his health?  Many factors should be considered. Watch out for unintended consequences.

[maybe4less]

I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

[LC]

FWIW I agree on valuation. I sold my 3M shares over the summer (of course it then ran up another $20/sh so take anything I say with big ole grain of salt)

[benchmark]

I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

 

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

[james22]

I appreciate the advice, everyone.

 

My father was inclined to hold anyway for sentimental reasons, so he's happy for the excuse.

 

And he's an equal sized IRA so can offset the risk there.

 

 

[maybe4less]

I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

 

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

 

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

 

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

 

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.

[rpadebet]

If puts expire in the money, aren't you now exposing yourself to short term capital gains rate instead of the favorable long term rate at a time when your stock itself is down?

 

Some of the companies we buy stay undervalued for years but don't we hold those hoping undervaluation would be cured?

On the flip-side isn't it ok to have over-valuation persist for a while too?

Why not let some good luck offset some of our bad luck.

 

We are not all Malone genius. Investing is complex enough as it is without introducing this new tax dimension

 

[benchmark]

I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

 

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

 

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

 

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

 

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.

 

Removing cash from the account by borrowing on margin -- is that only applicable to the portfolio margin account? can't you simply do it with the reg-T account?

[compoundinglife]

I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

 

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

 

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

 

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

 

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.

 

Removing cash from the account by borrowing on margin -- is that only applicable to the portfolio margin account? can't you simply do it with the reg-T account?

 

Sure you can borrow cash on margin from a reg-T account. But reg-T does not take hedging into account when calculating your margin equity so you either borrow much less or increase your risk of getting called. In theory with portfolio margin and a hedged position you could set it up so that massive drop in the stock price does not change your margin requirements. I say in theory because I never used portfolio margin so I don't know the little details.

[plato1976]

What if your father just sends this to you as a gift?

Then your father has a life-time 5m-10m gift untaxable, and your new basis is the current price so you can sell without incurring capital gain

 

right?

 

 

My elderly father has several million of 3M in taxable.

 

I'm convinced it is ~20% overvalued:

 

 

Yes, 3M is (grossly) overvalued beyond any reasonable doubt.

 

https://seekingalpha.com/article/413253 ... ke-mistake

 

3M Is Overvalued.

 

https://seekingalpha.com/article/413241 ... ter-prices

 

 Using several valuation models, I find that 3M’s stock price is overvalued...

 

https://seekingalpha.com/article/413013 ... gs-bargain

 

 ... 3M's stratospheric valuation.

 

https://seekingalpha.com/article/412728 ... may-coming

 

 

What to do about it?

 

I'd shift to (fairly valued) BRK, but selling will incur a 20% LTCG tax (the +3.8% has gone away, yes?).

 

Should I consider the overvaluation to make the tax "free"? Or does the tax make the overvaluation "free"?

 

Bearing in mind step-up basis would allow later selling without any tax hit, any thoughts?

 

Thanks.

[gfp]

not to discourage someone giving him several millions dollars but his basis would still be his dad's basis

[bookie71]

not to discourage someone giving him several millions dollars but his basis would still be his dad's basis

 

 

Did the new tax law do away with the step up in basis on death?  On the old tax law a gift is valued at the donor's cost basis, but at market value if passed on at death (inherited)

[maybe4less]

not to discourage someone giving him several millions dollars but his basis would still be his dad's basis

 

 

Did the new tax law do away with the step up in basis on death?  On the old tax law a gift is valued at the donor's cost basis, but at market value if passed on at death (inherited)

 

The step-up basis on death for inherited property still exists. However, I believe there is still no step-up for property gifted by someone who is living.

[bookie71]

 

That's what I said.  Donor is the gifter.

[gfp]

Yeah - I was referring to the post above mine:

 

What if your father just sends this to you as a gift?

Then your father has a life-time 5m-10m gift untaxable, and your new basis is the current price so you can sell without incurring capital gain

 

right?

 

It doesn't really solve the "currently slightly overvalued" issue to wait until someone dies.

[randomep]

I believe Ericopoly solved this problem a number of years ago. Open a Portfolio Margin account somewhere (I know Interactive Brokers works), buy puts to cover your appreciated position, and then withdraw cash on margin.

 

Can you elaborate on this or point me to the original post of Ericopoly? I'm trying to figure out a way to hedge the gain on bank stocks.

 

Dealing with (maybe not hedging per se though) the gain on bank stocks (specifically BAC) is exactly the problem Ericopoly was trying to solve.

 

In order to avoid a large capital gains tax bill, but still take money out of your portfolio with this strategy, you first must make sure you have a Portfolio Margin account (as opposed to the standard Reg-T  margin account). My understanding is that Portfolio Margin will look at different offsetting positions when determining whether or not to make a margin call. For example, if you buy at-the-money puts that cover your bank stock, any decline in the stock should be more or less offset by the gain in the puts. Portfolio margin will give you credit for the gain in the puts, while Reg-T will not.

 

Once you have your appreciated stock protected with puts, you can remove cash from the account by borrowing on margin. Hopefully, the puts expire worthless and you get a tax write-off. Rinse and repeat by buying more puts. If the puts appreciate in value due to a steep decline, sell them and reduce your margin borrowing. If the stock continues to appreciate, your margin borrowing ability grows.

 

But this idea is not based on the premise you can get something for nothing right?  Isn't this just delaying the inevitable?  If the stock stays flat and you repeatedly buy puts you still have to pay interest on the money you borrow.  If the stock tanks your puts will now have the capital gain, and the tax for it you cannot put off.

 

The only way I see to avoid the tax is to wait for the owners death like others are saying.......