The Tax Cuts and Jobs Act of 2017 presents a number of potential opportunities—and challenges—for your portfolio as you work to minimize your tax liability and maximize progress toward your investment goals. That’s especially true for high-net-worth investors with broadly diversified assets.
Here, some key actions you may want to consider.
1. Invest more in the next generation. The estate tax exemption doubles to $22.36 million per married couple, so if your estate could be valued between $11 million and $22 million, consider maximizing your gifting before 2025, when this and other aspects of the new law expire. “If you have excess or unproductive assets, this may be the time to hand some things off,” says Will Hamerman, a Senior Wealth Planning Strategist at Wells Fargo Private Bank.
That may be especially true if you’re considering selling an asset that would require you to pay capital gains taxes. “Giving equities or property to family or nonprofits (see below) may help you avoid that tax hit, and could be a strong gifting option,” says Amy Theisen, Senior Director of Planning at Wells Fargo Private Bank.
2. Hold on to the tax advantages of supporting your favorite causes. With the standard deduction for a married couple rising to $24,000 from $12,700, some investors will no longer itemize deductions, which can limit the tax benefits of charitable giving. Consider a donor-advised fund, which allows you to set aside—and invest, with the potential for tax-free growth—money for charities and give it over the long term, while claiming a deduction for the entire amount when you set it up.
3. Explore commercial real estate (CRE) investments. Few investment opportunities stand to gain as much from tax reform as CRE. “The tax cuts could have a major positive impact on the economy, which should flow to real estate,” says Scott Bennett, a Real Estate Advisory Specialist with Wells Fargo Wealth Management.
What’s more, the typical CRE holding structure is a “pass-through” such as with an LLC or limited partnership, where profit “passes through” the business to the owners’ individual tax returns, and the new law provides many owners a new deduction of up to 20 percent of qualified business income. “While the provisions of the new law are a little complicated compared to the previous tax system, real estate held in certain corporate structures may be eligible for new benefits,” compared to the previous tax system, says Scott Kapin, a Real Estate Advisory Specialist with Wells Fargo Wealth Management. “Be sure to consult with your tax and real estate advisors to understand how the benefits may apply to you.”
Finally, 1031 exchanges, which allow investors to defer capital gains taxes on the sale of property when reinvesting in another qualifying property, remain in place for real estate, something CRE lobbyists fought for. “That was incredibly important to maintain for real estate investors and the overall real estate markets,” Kapin says
“While the provisions of the new law are a little complicated compared to the previous tax system, real estate held in certain corporate structures may be eligible for new benefits.” —Scott Kapin, Real Estate Advisory Specialist, Wells Fargo Wealth Management
4. Learn all you can about state and local taxes. The new $10,000 cap on deducting state and local taxes could have a major impact in high-tax states, such as New York, New Jersey, and California, which may inspire you to change your official residence. There’s much to monitor as the IRS clarifies its rules and states respond in an effort to hold onto residents and keep money flowing into their coffers. “Keep an eye on your own state and situation,” Theisen says. “Many things could change by the end of the year.”
If you have multiple homes, it may be worth considering moving them into a pass-through entity as a business, such as a vacation rental, because if a property is used in a trade or business, the lower tax rate might minimize the hit from the limited deduction.
5. Superfund your education savings. An established tool for tax-efficient college savings, Section 529 plans* may now be an even better deal, tax-wise. You can use up to $10,000 a year for private elementary or secondary schools, so you may want to move more funds there.
6. Talk with your advisor as soon as you can. Start high level, with a full-portfolio view for the long term, keeping in mind that many of the new regulations expire in 2025. Find out what tax reform means for you, and how you can make changes to benefit more or avoid pitfalls. “Talk now,” Theisen says. “Even if you don’t have to make any major changes, you’ll know you’re on the right path.”