$100K in stock option sale gain. tips to save on tax

[nezphor]

Folks,
Let us say , some one has $100K gain in stock option sales in 2007 financial year. With option's tax rate of about 42%, roughly $42K goes just for the tax. For someone who refuses to buy into the speculative world of US real estate market especially in Bay area (hence no mortgage, not even first mortgage), what are the legal avenues for saving on capital gain taxes?

Thanks in advance.

[Old-Spice2]

Regular stuff like maxing out on 401K, FSA. That is it. It is hard to stomach the big tax bill, right? No other way out.

[idli-vadai]

The hybrid car tax credit will NOT work for everybody as this article illustrates.

"
.. you can't get the full $3,150 credit for purchasing a Toyota Prius unless your regular tax obligation exceeds your Alternative Minimum Tax (AMT) obligation by at least that amount.

If you paid AMT the last time you filed (as did more than 600,000 Californian taxpayers), I trust you knew up front that there would be no tax credit for your hybrid purchase -- nada, zilch
"

- Buy a hybrid car

[nezphor]

Three points that I want to emphasize..

1. No real estate or first home mortgage.
2. Only legal ways without any misuse of tax laws.
3. All retirement savings(401K, IRA) are maxed out.

I have been thinking of starting a product based company for long time as a part time business, focussed on developing embedded devices having web interface intelligence. It requires investment in hardware and software. Is this a good year/time to start this? Can the investment in small business be deductible in capital gains assuming I choose the right business structure (LLC , proprietorship etc)? Any input from experts here who have successfully launched part time businesses?

Thanks a lot.

[NRIInvestor2006]

>> Can the investment in small business be deductible in capital gains

No. Not until you generate Capital Losses/Gains from your business. Until that point you simply invested your money without any Losses or Gains.

Think of it as investing in Stock Market. Until you sell the security you dont have any Gains or Losses and upto that point it is just an investment and hence NO deductions.

The only viable option is to buy a house. I agree with you that the prices in the bay area are way too high and strictly from a financial stand point it doesn't make any sense to spend 6% in ownership expenses, where you can rent the same house for ~3% less money. Ex: taking a $1mil house and pay 6% interest + Property Tax + insurance etc vs rent the same house for ~ $3000. Again, I'm not considering personal opionions/assumptions about future appreciation, individual preferences to own etc which will change this equation.

But, if you can buy a house for around $600K or less (it could be a townhouse/condo doesn't matter), it may still make sense to buy a house and that would be your best bet to reduce your tax burden.

So the options are take the tax hit and forget it or evaluate buying a reasonable house (Financially speaking) and see if you can live with it for a while.

btw, I'm in the exact same situation as you. :emsmilep:

[desihometown]

I'm in the same situation too.How about investing outside the Bay Area ?
Like Texas or Florida and renting it out ?
You can gain Mort deduction and the rent can be offset with depreciation.

If you guys are interested in researching some options
for real estate for 300K or less, we can probably do some research together and exchange ideas. What do you say ? I'm getting screwed (almost 45%) with taxes in CA on both my income and my options. (33$fed+9%state+medicare = 45%), This sucks.

do lemme know if you guys come up with other ideas. thanks a lot.

[nezphor]

NRIInvestor2006, your ans clarifies the question I had on capital investment. But I see companies (corps) writing off investments... Not sure if they are governed by different rules.

Regarding the first home, only the interest paid over and above standard deduction becomes useful for tax. For a $500K home, that is roughly about 20K (30K-10K std deduction) with a tax gain of $5000 per year at 25% tax rate. Do you think, a gain of $5K is justifiable for a significant risk in the current market where the housing prices are expected go down as much as 10 to 20% or even more. Additionally, what about the opportunity cost of investing the "down" payment? (roughly about 50K). This does not even take into account other expenses and the premium to pay for owning vs
renting a comparable house.

desihometown, My understanding is that only the home where you actually live is legally eligible for tax deduction. That is, living in Bay area and having a home in Florida won't help in mortgage tax deduction. Is it right?

[desihometown]

I think u can get mortgage interest deduction for both primary and second home.

w.r.t, putting in 50K for down payment, what is the other alternative ? Invest in mutual funds (fixed income will only return 3% or so after taxes). Even mutual fund might return 5-6% after tax.

But in the case of real estate u r getting rent on your return, arent you ?
Even assuming 1000$ per month for 12 months - property tax(even that is deductible) - mortgage (deductible again) - proeprty management, you'll probably end up with 100-200$.

But the advantage is, it will reduce your AGI, which is the main thing we are talking about.

w.r.t, itemized deduction, the point is, if you are paying a lot of state taxes, (assuming u made 100K in options, you would have paid atleast 9K in state taxes + taxes on you CA income. ASsuming 100K average, thats another 9K. So, the OP can itemize even without mortgage (18K). Adding mortgage to it, (say another 10K), will probably make it close to 30K.

I suppose it reduces the OP AGI a little bit, but not too much. You'll still probably end up in the highest tax bracket and maybe pay AMT bro.

I'm in an almost similar situation. Sucks big time. (ANother option is to have a thick fat martgage aka Bay area home).

But then, you are paying money to the bank (aka large mortgage interest) instead of uncle Sam.

You'll probably feel happy that u are paying less to uncle Sam. But, uncle Bom (BankOfaMerica) will get the rest :-)

Plus I'm not comfortable buying a 700-800K home. It just makes me feel uneasy. The other alternative is a 500K shitty condo.
My current rental place is way better than most for sale condo and for a lot lot less than mortgage.

I need more inputs on real estate in bay area. That would be one way to park some money and pay some mortgage to reduce AGI.

But then what happens after the mortgage is all paid off :-) ? Back to square one. Invest in one more home ? :-)

Aaah. The exact same thing the Bhagvad Gita talks about. Bondage. my dear friend. Bondage to the illusion of growth :-)

[NRIInvestor2006]

desihometown,

I'm looking for such options as well and am really interested in doing something along those lines.

So far, I have not focused on this, but now that Indian RE is in stabilization period, I am thinking of buying out of the state RE here in the US.

While the RE is not in the best shape these days in the US, there are places like Raliegh, NC that are still appreciating and have good Price to Rent ratios.

One of the major issues to deal with is the distance from the property. I was thinking of two options...1) Look for friends who are in those locations and invest with them or 2) Partner with a few folks with similar mindset like a lot of you on this forum and start investing.

Ofcourse, with any rental property the issue is with management and for that my opinion is to hire a manager/company to manage the property.

We can definitely hash out some of these issues associated with out of the state RE and see if we can come up with a workable plan (In a separate Thread or Group).

Do let me know (Send me a Private message) and I'm definitely interested.

[NRIInvestor2006]

the question I had on capital investment. But I see companies (corps) writing off investments... Not sure if they are governed by different rules.


While some of the terms are loosely used here, let me try to answer.

Companies write off investments in two cases. 1) When it turns out to be a Bad investment or 2) If you are spending money on Capital Expenses (Capex)

So to give you a better example, say, you start your company and you made $100k in PROFIT.

Now, you take $50k and invest in something else and loose all the money. In this case you can write off the investment as a loss.

or you can fixed buy physical assets such as property, industrial buildings or equipment. These can be written off.

The term Write off is typically used in a Bad investment scenario. But I answered your question by translating "Write Off" = "Less Taxes" context.

From a strict Accounting Stand Point my answer would be different.