Investors: Beware of the Wash Sale Rule

Investors: Beware of the Wash Sale Rule


A tried-and-true tax-saving strategy for investors is to sell assets at a loss to offset gains that have been realized during the year. So if you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2017 tax liability.

But what if you expect an investment that would produce a loss if sold now to not only recover but thrive in the future? Or perhaps you simply want to minimize the impact on your asset allocation. You might think you can simply sell the investment at a loss and then immediately buy it back. Not so fast: You need to beware of the wash sale rule.

The rule up close

The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.

Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Achieving your goals

Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

  • Sell the security and immediately buy shares of a security of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
  • Sell the security and wait 31 days to repurchase the same security.
  • Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss. Then wait 31 days to sell the original portion.

If you have a bond that would generate a loss if sold, you can do a bond swap, where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.

For more ideas on saving taxes on your investments, please contact us.

Why You Should Boost Your 401(k) Contribution Rate Between Now and Year End


One important step to both reducing taxes and saving for retirement is to contribute to a tax-advantaged retirement plan. If your employer offers a 401(k) plan, contributing to that is likely your best first step.

If you’re not already contributing the maximum allowed, consider increasing your contribution rate between now and year end. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.

Traditional 401(k)

A traditional 401(k) offers many benefits:

  • Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • Your employer may match some or all of your contributions pretax.

For 2017, you can contribute up to $18,000. So if your current contribution rate will leave you short of the limit, try to increase your contribution rate through the end of the year to get as close to that limit as you can afford. Keep in mind that your paycheck will be reduced by less than the dollar amount of the contribution, because the contributions are pre-tax so income tax isn’t withheld.

If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2017). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding.

Roth 401(k)

Employers can include a Roth option in their 401(k) plans. If your plan offers this, you can designate some or all of your contribution as Roth contributions. While such contributions don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners, because they don’t have the option to contribute to a Roth IRA. On the other hand, if you expect your tax rate to be lower in retirement, you may be better off sticking with traditional 401(k) contributions.

Finally, keep in mind that any employer matches to Roth 401(k) contributions will be pretax and go into your traditional 401(k) account.

How much and which type

Have questions about how much to contribute or the best mix between traditional and Roth contributions? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.

Save More for College Through the Tax Advantages of a 529 Savings Plan


With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option, which can be especially beneficial if the children in question still have many years until they’ll be starting their higher education, is a Section 529 plan.

Tax-deferred compounding

529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. So these plans can be particularly powerful if contributions begin when the child is quite young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

More pluses

529 plans offer other benefits as well:

  • They usually have high contribution limits.
  • There are no income-based phaseouts further limiting contributions.
  • There’s generally no beneficiary age limit for contributions or distributions.
  • You can control the account, even after the child is a legal adult.
  • You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions, which means you can make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse) in 2017. In the case of grandparents, this also can avoid generation-skipping transfer taxes.

Minimal minuses

One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary.

But whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months.

We’ve focused on 529 savings plans here; a prepaid tuition version of 529 plans is also available. If you’d like to learn more about either type of 529 plan, please contact us. We can also tell you about other tax-smart strategies for funding education expenses.

Watch Out for Potential Tax Pitfalls of Donating Real Estate to Charity


Charitable giving allows you to help an organization you care about and, in most cases, enjoy a valuable income tax deduction. If you’re considering a large gift, a noncash donation such as appreciated real estate can provide additional benefits. For example, if you’ve held the property for more than one year, you generally will be able to deduct its full fair market value and avoid any capital gains tax you’d owe if you sold the property. There are, however, potential tax pitfalls you must watch out for:

Donation to a private foundation. While real estate donations to a public charity generally can be deducted at the property’s fair market value, your deduction for such a donation to a private foundation is limited to the lower of fair market value or your cost basis in the property.

Property subject to a mortgage. In this case, you may recognize taxable income for all or a portion of the loan’s value. And charities might not accept mortgaged property because it may trigger unrelated business income tax. For these reasons, it’s a good idea to pay off the mortgage before you donate the property or ask the lender to accept another property as collateral for the loan.

Failure to properly substantiate your donation. This can result in loss of the deduction and overvaluation penalties. Generally, real estate donations require a qualified appraisal. You’ll also need to complete Form 8283, “Noncash Charitable Contributions,” have your appraiser sign it and file it with your federal tax return. If the property is valued at more than $500,000, you’ll generally need to include the appraisal report as well.

Sale of the property within three yearsThe charity must report the sale to the IRS, and if the price is substantially less than the amount you claimed as a tax deduction, the IRS may challenge your deduction. To avoid this result, be sure your initial appraisal is accurate and well documented.

Sale of the property to someone related to you. If the charity sells the property you donated to your relative (or to someone with whom you negotiated a potential sale), the IRS may argue that the sale was prearranged and tax you on any capital gain.

If you’re considering a real estate donation, plan carefully and contact us for help ensuring that you avoid these pitfalls.