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Author: frontaloeb Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: More on Cap Gains Tax Bubbles Date: 12/13/1999 5:19 PM
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My Internet startup is being sold (thank you), and part of that will involve a cash settlement of about $130K in the form of a capital gain on stock I purchased over 1 year ago. I expect the gain to come this week or next (!), and I'm wondering if there's anything I can do to shelter the money. In particular:

1) If it is used immediately to purchase other stocks, is that not taxable? Some of the advice on this message board has lead me to that perhaps false conclusion. If I can roll the money into other stocks and not pay any taxes, that would be great!

2) Does it make sense to put the likely tax money (28%, yes?) into a 3-month tax-free municipal bond so that I can get the interest before the taxes are due?

3) Are there other annuities like IRA that an individual can use. IE I do not have a 401(K) to work with.

My wife and I have a house, and we can deduct 1/3 of the home improvement expenses. We will do that with some money, but we don't have $100K worth of improvements to make! We also have some preferences for charities, so some of the money will go there, but charitable giving hardly qualities as a shelter.

Thanks in advance

FrontaLoeb
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Author: BladeXrunners One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23016 of 121144
Subject: Re: More on Cap Gains Tax Bubbles Date: 12/13/1999 6:10 PM
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My Internet startup is being sold (thank you), and part of that will involve a cash settlement of about $130K in the form of a capital gain on stock I purchased over 1 year ago. I expect the gain to come this week or next (!), and I'm wondering if there's anything I can do to shelter the money. In particular:

1) If it is used immediately to purchase other stocks, is that not taxable? Some of the advice on this message board has lead me to that perhaps false conclusion. If I can roll the money into other stocks and not pay any taxes, that would be great!


Any distribution in cash or right to cash is taxed. Right to cash means you have the choice between cash or stock. Even if you choose stock, it's taxed as though you had received cash. The only way you will not be taxed is if your stock is exchange for other "like" stocks (e.g. common for common, preferred for preferred). That is, the only way you won't get tax is if the settlement is in the form of stocks.

Immediately using your cash to buy other stocks does not prevent the distribution from being taxed this year.

2) Does it make sense to put the likely tax money (28%, yes?) into a 3-month tax-free municipal bond so that I can get the interest before the taxes are due?

Tax are paid as you earned; i.e. it's due the second you received the cash. April 15 is for "tying up loose ends". It is not the date taxes are due. Any underpayment of tax will be penalized, although this may be waived if you meet certain conditions. If you meet these conditions, yes, put the money in a safe investment like a 3-month bond. If you don't, pay the tax now or pay more later.

(28%, yes?)

You only wish. A $130k cash settlement plus other compensation, you're probably looking at 39.6% plus what the state and local is.

3) Are there other annuities like IRA that an individual can use. IE I do not have a 401(K) to work with.

If you're the owner of this company, you can fund a Keogh plan or a SEP-IRA. If this company have employees, you'll have to fund their also. See an expert for details.


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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23021 of 121144
Subject: Re: More on Cap Gains Tax Bubbles Date: 12/13/1999 6:33 PM
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My Internet startup is being sold (thank you), and part of that will involve a cash settlement of about $130K in the form of a capital gain on stock I purchased over 1 year ago. I expect the gain to come this week or next (!), and I'm wondering if there's anything I can do to shelter the money. In particular:

1) If it is used immediately to purchase other stocks, is that not taxable? Some of the advice on this message board has lead me to that perhaps false conclusion. If I can roll the money into other stocks and not pay any taxes, that would be great!


As you've suspected, you can't defer taxes by simply rolling over your sales proceeds into another stock. However, I will toss out one possibility, although I suspect that it will not apply to you. If this is a qualified small business, it may be possible to roll a gain over into another stock. I don't have all the details in front of me, but to qualify you'll generally need to be the founder of the company (with a couple of partners is OK, too). If this does apply to you, run (don't walk) to a qualified tax advisor. This is a complicated area with a lot of money riding on it - not exactly the kind of thing I'd want to get advice from anonymous internet message board posters.

2) Does it make sense to put the likely tax money (28%, yes?) into a 3-month tax-free municipal bond so that I can get the interest before the taxes are due?

Since you've held the stock for over a year, it will be long-term and taxed at 20%, not 28%. It certainly makes sense to hang onto the tax money as long as possible, but make sure you have paid in enough to avoid penalties for underpayment of estimated tax. For your case, it will most likely mean making sure you've paid in (through withholdings or estimated payments) at least as much as last year's tax liability.

3) Are there other annuities like IRA that an individual can use. IE I do not have a 401(K) to work with.

IRA can invest in plenty of things besides annuities. Stocks, bonds, mutual funds are all OK in an IRA.

My wife and I have a house, and we can deduct 1/3 of the home improvement expenses. We will do that with some money, but we don't have $100K worth of improvements to make! We also have some preferences for charities, so some of the money will go there, but charitable giving hardly qualities as a shelter.

I'm not sure what you mean by deducting 1/3 of home improvements. Can you elaborate? Improvements to your residence increase your cost basis in the residence, decreasing the gain (or increasing a loss) when the house is sold.

If you are considering some charitable giving, I'd really encourage you to donate the stock before it is sold. Since you've held it for the long term gain treatment, you've got a big potential tax break. If you donate shares of stock instead of cash, you will get an itemized deduction for the FMV of the stock and you will not have to recognize the gain on those shares. Just as much money goes to the charity and less to taxes - sounds like a good shelter to me. <grin>

Hope some of this is helpful and congratulations on the success.

--ptheland

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Author: frontaloeb Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23056 of 121144
Subject: Re: More on Cap Gains Tax Bubbles Date: 12/14/1999 12:35 AM
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I'm not sure what you mean by deducting 1/3 of home improvements. Can you elaborate?

-- technicality. We have a renter.


If you donate shares of stock instead of cash, you will get an itemized deduction for the FMV of the stock and you will not have to recognize the gain on those shares.

-- Know anything about 1-year lockup agreements? Does it work to donate shares now when the charity can not sell them for 1 year? What's the FMV in that case!?
:) I think this shelter will have to wait...



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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23060 of 121144
Subject: Re: More on Cap Gains Tax Bubbles Date: 12/14/1999 1:22 AM
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I wrote:
I'm not sure what you mean by deducting 1/3 of home improvements. Can you elaborate?

frontaloeb responded:
-- technicality. We have a renter.

My reply:
I trust, then, that you are aware that you don't really *deduct* home improvements (repairs, yes; improvements, no). Improvements are capital in nature and must be depreciated over 27.5 years for residential rental real estate. (Just in case someone else reading might have the same situation.)

frontaloeb:
-- Know anything about 1-year lockup agreements? Does it work to donate shares now when the charity can not sell them for 1 year? What's the FMV in that case!?
:) I think this shelter will have to wait...


Other than they can get messy, no. But I don't think that would necessarily have a bearing on a charitable contribution - as long as you can, under the terms of the lockup agreement, transfer the stock to the charity. Granted, the lockup probably restricts *any* transfer, but I could see a charitable transfer as a possible exception. A valuation would likely take into account the restriction on the shares, but could still be done. And any capital gain would still escape all income tax.

I'll confess - I'm an ardent supporter of charitable giving. I hope I'm not coming across too strong here. I just like to find ways to reduce taxes as much as possible where giving is concerned.

--ptheland

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Author: 4aapl Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 23214 of 121144
Subject: Re: More on Cap Gains Tax Bubbles Date: 12/16/1999 1:08 AM
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(28%, yes?)

You only wish. A $130k cash settlement plus other compensation, you're probably looking at 39.6% plus what the state and local is.


That depends a lot on what your joint income is aside from the $130k. I don't have the "married, filing jointly" #'s infront of me for 99, but expect them slightly higher than the rounded 98 #'s of 15% for up to 42k, 28% for 42-102k, 31% for 102k-156k, 36% for 156k-278k and $39.6 % for higher. Don't forget to take out your deductions, as they do matter a little. At $100k income without this, you're looking at about 34% federal tax. Not a huge difference from 39.6%, but enough to mention.

Play with the #'s to figure it out for your specific situation. Best of luck.

Aaron

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