Appreciating Investments

Investments that increase in value while paying no income to you are not taxed until they are sold. By timing that sale carefully, you can improve your tax and financial position.

For example, you can wait to sell investments until a year in which your tax rate is low. Or, you can give the investments to your children who are older than age 19 (or age 24 for full-time students); they may sell them and be taxed at their lower rate. (Be sure to consider potential gift tax implications.)

If you plan to pass the investment to your spouse tax free at your death under the unlimited marital deduction, you may wish to keep the investment. The investment may also pass to your beneficiaries tax free at your death if your gross estate is less than $11.58 million or $23.16 million for married couples (the estate tax exemption amount in 2020). In addition, your heirs can benefit from a step-up in the investment’s basis to its fair market value at the date of your death. In other words, at the time of eventual sale, capital gains taxes are assessed only on the increase in property value from the time of inheritance to the time of sale by the heir.

When deciding whether to buy or sell, consider the costs associated with an appreciating investment, including brokers' fees, closing costs, and property taxes, as well as potential appreciation.

To calculate exact gains or losses on mutual fund investments, save every statement. Determining which shares are sold can reduce your gain, or at least qualify it as a long-term gain, which is subject to lower tax rates. Also consider everything that comprises your basis:

  • Commissions or fees paid when you bought the shares;
  • Reinvested dividends for which you have been taxed;
  • Nontaxable returns of capital.