Notice that the 351 swap requires at least 17 assets–
| 351 Exemption Requirement | ||
|---|---|---|
| 25% for largest | ||
| largest 5 no more than 50% total | ||
| 1 | 25 | 25 |
| 5 | 5 | 25 |
| 10 | 4.99 | 49.9 |
| 1 | 0.1 | 0.1 |
| 17 | 100 |
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I forgot to clarify this.
Section 351 does not exempt your capital gain from tax. It defers the tax. The mutual fund shares you acquire in the exchange will take in the old, low basis you have in your stock. Selling the fund shares will generate big capital gain taxes just like selling the shares would.
What this strategy does is allow you to rebalance or diversify your portfolio of stocks without incurring capital gain taxes in the process.
In contrast, the charitable contribution strategy allows you to get the full value of the shares without incurring the capital gains tax.
—Peter
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And you can avoid capital gains by letting your heirs inherit at a stepped up basis. Attractive especially if your assets include high fliers that might crash one day.
Since I have one holding with very large gains, I looked into this about a year ago. There are plenty of hurdles that are difficult to meet when you only have one or two stocks with outsized gains. Those hurdles make this less useful for most people. And then there are other negatives (I only did a cursory examination and this is solely from memory) -
- Once you do the exchange, you do not have “freedom of action” for quite some time, somewhere between 5 and 7 years as I recall (not 30 days as mentioned above).
- The companies that provide this service (exchanges) tend to be small and therefore risky. I assume if one goes belly up another one will take the assets under their own umbrella … for a fee of course.
- The fees are substantial in most cases.
I’m not sure where you got the 10% number from??? Maybe from some ancient (well, older) tax law? For most of us, the long-term capital gains tax rate would be 15%/18.8% or 20%/23.8%, and for anyone taking a very large gain (the kind we are discussing), a large portion of it would indeed be taxed at 23.8%. Plus any state taxes if you live in a state that taxes capital gains.
I’m not sure this would work for them. Let’s say they have $5M of spaceX stock and want to diversify. The way I understand it is that in order to diversify $1M of spaceX stock, they need to come up with another $3M of other investments (because one stock can only comprise 25% of the rollover exchange). Someone correct me if this statement is wrong.
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