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For the purposes of this question, suppose:

  1. I'm moving from a state with 0% capital gains tax to a state with 5.25% capital gains tax;
  2. All capital gains are long-term;
  3. I have some mutual funds that I will probably sell in the next year or two;
  4. My marginal tax rate will only increase in the near future.

My thinking was--I'll have to "pay" taxes on the gains on my mutual fund holdings at some point, so it makes sense to sell them now when the (state) capital gains tax is 0% (and possibly re-buy the same mutual funds after the move) as opposed to holding on to the funds and paying 5.25% on what I've earned so far plus what I will earn in the next year or two.

I've had people tell me that my thinking is flawed, but I don't see any mistakes. Are there any reasons I shouldn't sell the mutual funds before the move?

  • 3
    If you die, the funds get a stepped up basis, and the tax is avoided altogether. If you plan to live, your idea is sound. You really shouldn't listen to people who aren't able to offer any backup. "you're wrong, I just don't know why." Really? +1, good question. Welcome to Money.SE. – JoeTaxpayer Jun 23 '15 at 16:23
  • What happens if you then move to a state with lower tax rates before you would have originally sold the mutual funds? – Eric Jun 23 '15 at 16:48
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    He's at zero now. You mean lower than the 5.25%? – JoeTaxpayer Jun 23 '15 at 16:59
  • @JoeTaxpayer Yes. – Eric Jun 24 '15 at 1:39
2

If you sell the investments with gains and repurchase them before moving, then the new cost basis should apply when selling later in the state that charges capital gains.

As long as you have the paperwork to back it up, there should be no problems for you.

  • Is there any reason to repurchase in old vs. new state? – Austin Buchanan Jun 23 '15 at 15:44
  • What state are you moving to? – Nathan L Jun 23 '15 at 15:51
  • Moving to Oklahoma – Austin Buchanan Jun 23 '15 at 15:51
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    The date of repurchase is the only consideration that I can see. If are planning to sell again soon, you want to hold them for at least 1 year from the repurchase date. – Nathan L Jun 23 '15 at 16:00
  • Even then, his risk is regular tax on 11.99 month's gain, vs his current cap gain. – JoeTaxpayer Jun 23 '15 at 17:00
2

What you're talking about has a name, it's called Tax Gain Harvesting, you can google it yourself, but here are some links to get you started.

Boglehead's article Tax gains harvesting

Mad Fientist article on Tax Gain Harvesting

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