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Author: froggies Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121338  
Subject: Re: Tax loss harvesting possible with MLPs? REIT Date: 8/6/2013 5:46 PM
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Thanks everyone for the comprehensive answers, and for the knowledgeable commentary on how basis affects this. Let's see if I can correctly summarize what everyone has told me, and then I'll talk a bit about my thinking here.

Summarizing somewhat stupidly: it sounds like MLPs are very poor candidates for tax-loss harvesting, while REITs would probably work. A REIT's distributions do not usually affect the basis. My understanding from looking at online examples is that ETFs can also be used for tax-loss harvesting.

Now on to some discussion of why I'm asking these questions and possible strategies that might make use of this information. Feel free to deflate any excessive optimism on my part, or address any misunderstandings.

I think most folks would agree that short and long capital losses have value. They have the most value to high-income, highly taxed individuals, which describes us right now. You can use capital losses to offset up to $3000 of ordinary income, which is helpful. You can use them to offset capital gains in other investments. My understanding is that you can accrue as many losses as you wish and roll them forward into future years.

Unlike many retail investors, we have no meaningful transactional costs associated with buying and selling securities. Unlike many casual investors, I'm researching companies and investing as a full-time undertaking. We have some dozens of investments and are adding at least $100,000 a year to our portfolio. A good amount of this goes into stocks like GLRE: a concession to the limits of my investing skill.

So that's the context: no frictional costs to rotating in and out of stocks, lots of time to think about existing and new investments, and lots of investment activity. We have winners and we have losers. Unlike a lot of investors, I feel like at any given time I have a fair number of good ideas for where money could be placed: more ideas than money.

Why do "tax loss harvesting"? Plenty of people ask the question. Here's how I see it: it is effectively a decision to convert a paper loss into an actual loss, but in so doing to realize a tax advantage that can be used at some point in the near or distant future. Any mortal investor with a large portfolio of securities will have some losers. So as a mortal investor, you can sit on that loss and have nothing for it, or you can realize the loss and bank the tax credit.

As Peter suggests, due to wash sale rules, there is a 60 day opportunity cost to tax loss harvesting (30 before, 30 after.) What if you miss out on the appreciation of a security you actually wanted to own? My response to that is twofold: first, it's often easy to find a correlated investment that doesn't run afoul of wash sale rules, and second, at any given time I have a lot of other perhaps equally interesting ideas for where that money could be invested. So I don't see the opportunity cost of this as a terribly compelling argument. There are some "down" securities I own that I wouldn't sell even to generate the capital loss: MSFT is a good example. But there are many other speculative investments that I'd be happy to exchange for a different form of speculation. The decision to generate the loss and tax credit is a decision to do something else interesting with the money, rather than just sitting on your loss for another 30 days.

With the preamble, explanations, and justifications out of the way, here's a possible strategy based on our discussion and your answers. Feel free to poke holes in this if I'm missing something.

Find a security that isn't an MLP that has a very high dividend yield, that you think has fundamental value (close to book or below) and that you don't think is going to go that far down. In the current climate, a REIT or REIT-alike may do (AGNC, AI, NLY.) Buy it before ex-dividend. Take your distribution, which (in the case of a REIT) will be taxed like regular income anyway. Sell the stock right after ex-dividend: it invariably generates a loss-that-isn't-quite-a-loss (because you were paid the dividend) in the days following. You get the dividend, the stock dives as it always does after ex-dividend, and you also get credit for the capital loss. Reinvest the money in a different REIT, or whatever great investment idea you happen to be entertaining. Repeat endlessly. $Profit.

Does this work, or is this broken? What am I missing?
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