Author: J. William Strickland, CPA, J.D.
This article originally appeared in the Winter 2026 issue of the South Carolina CPA Report
This article continues the topic of tax planning strategies for high-net worth clients discussed in the Fall issue.
Human nature often clings to losing financial assets, hoping they will rebound to sell them for a gain or avoid a loss. A better play: sell the loser, use the allowable $3,000 capital loss to offset other income, carry over the remaining loss at $3,000 per year, and redeploy the money into better investments. The best play: sell the losing assets and use those losses to offset gains on other investments.
If you have a winning position in Nvidia and a $10,000 loss in Walgreens, you can capture some gain in Nvidia tax-free. Sell enough to cover the $10,000 Walgreens loss, or $7,000 if you apply the $3,000 capital loss in the current year. This is called “tax loss harvesting.”
Real estate presents a host of opportunities.
Tax-Free Appreciation
Land tends to appreciate, with property taxes and insurance as its primary carrying costs. Location is key to maximizing appreciation.
Deferral of Gain Through Exchanges
To dispose of real estate for more attractive property, you can use Section 1031 to defer gains to the time you sell the replacement property. If the replacement property is more valuable, all gain is deferred. Delaware Statutory Trusts qualify for Section 1031 treatment, which may be attractive for some clients. Investors periodically trade up to enhance wealth.
Capital Gains Treatment
If you aren’t a real property dealer and sell it at a gain, you can realize some or all of the gain as capital gain. Non-depreciable property gains are taxed at capital gain rates. For depreciated property, recapture depreciation first; then the remaining gain is capital gain. Depreciation offsets ordinary income in earlier years, so recognizing it later means the time value of money works in your favor.
Leverage with Lower Risk
Rental real estate can be a no-cost investment that appreciates, and using leverage can enhance its income. If gross rent covers property taxes, insurance, interest, and repairs, the property is a cost-free investment. Depreciation is a bonus, reducing net rental income or even creating reportable losses. However, these losses are subject to passive loss limitations, unless the rental activity is considered an active trade or business by the taxpayer qualifying as a real estate professional.
Tax Credit Opportunities
Tax credits may be available to offset tax liabilities for certain types of investments.
- Qualified Opportunity Funds: While not technically a tax credit, investing in a qualified opportunity fund can be beneficial: First, you can defer gain by investing in the fund. Second, keeping the investment for several years —five, seven, or ten— reduces the amount of gain when you sell. A 10-year holding period eliminates taxation on the gain altogether.
- Low-Income Housing Tax Credits (LIHTC): Investing in an LIHTC project—typically through an LLC—lets you buy credits at a reduced rate and arbitrage the tax benefit against your tax liability.
- Historic Rehabilitation Tax Credit: This credit can significantly reduce the cost of rehabilitating historic property, and the property may also qualify for state tax incentives.
- State Tax Credits: Available South Carolina credits include Gift of Land for Conservation, Scenic Rivers, Palmetto Seed Capital, Community Development, Industry Partnership Fund, Venture Capital Investment, Angel Investor, and Rehabilitation credits.
- Additional Tax Credits: Tax credits beyond those cited can be a dollar-for-dollar benefit against the client’s tax liability. Many high-net-worth clients achieved wealth through business ownership—either directly or with other investors (LLCs, partnerships, and S corporations).
Common federal tax credits include the Work Opportunity Credit for jobs, Research and Development, Fuel, Access for Disabled Individuals, Small Employer Pension Plan Startup Costs, Employer-Provided Child Care, Wage Credit for Active Duty Employees, Employee Health Expenses, and Paid Family and Medical Leave. In South Carolina, common tax credits include job-related credits such as jobs and apprentice programs, Research and Development, Corporate Headquarters, Employee Child Care, Infrastructure, and several Rehabilitation credits.
Some state credits are virtually automatic—if you qualify for a federal tax credit, you probably qualify for the similar state tax credit.
Tax-Efficient Investing: Strategies for Lower Taxes
Tax-efficient mutual funds and exchange-traded funds aim to reduce the amount of income recognized by the fund without sacrificing significant investment returns. Common techniques include tax harvesting, tax exempt investments such as municipal bonds, and timing of transactions.
When a client’s tax bracket is unusually low—or expected to rise—consider withdrawing more than the required minimum distribution to pay less tax in the current year than in future years and lower future required distributions.
Turning Ordinary Income into Capital Gains
Strategic investments can convert ordinary income into capital gains. Syndicated offerings offer early-year write-offs and later-year capital gains payouts. Another technique is to invest in timberlands, which yield timber capital gains when trees are harvested and ordinary losses for forest management costs in other years. In years without harvesting and minimal management costs, the potential capital gain continues to grow.
Aggressive Tax Positions: What to Watch For
Tax avoidance is legal; tax evasion is not. Clients may need guidance on which expenses are currently deductible and which to capitalize for future depreciation or amortization. Building and facility component studies can reclassify property elements with shorter lives, accelerating deductions. Many aggressive positions appear in syndicated offerings, such as conservation easements, which the IRS scrutinizes. Review offering documents carefully to ensure your client’s risk tolerance aligns with the tax positions involved.
Life Insurance: Tax Advantages Beyond Protection
While life insurance premiums may not be deductible, cash value builds tax-free, and the death benefit is income-tax-free. Loans against cash surrender value do not trigger current income taxation; but must be monitored to ensure they do not exceed the value. Borrowers can add interest to the outstanding balance instead of paying it currently. If interest exceeds the increase in cash surrender value, it may trigger a tax recognition event. If the policy is underwater and terminates, income recognition is only offset by the amount of premiums paid to date—often far less than the increase in cash surrender value.
Tax-Deferred Annuities: Building Value Over Time
Similar to life insurance, a tax-deferred annuity allows for tax-free buildup in value over time. The annuity is typically paid over a period of time in retirement with a portion of the payout being non-taxable based on the contributions to the annuity.
ESOPs: A Tax-Smart Exit Strategy
An employee stock ownership plan (ESOP) is a qualified plan often created when an owner sells stock to the ESOP in return for a note payable over time or at future dates. Once established, the company can make deductible contributions to the ESOP, which can then be used to pay down the note or acquire additional stock. Owners benefit from capital gains treatment on the sale and the ability to report the gain on an installment basis. Employees benefit through indirect ownership of the business, which they can cash out at retirement.
