How to Diversify Your Portfolio Without Incurring Capital Gains

Are you looking to diversify out of concentrated stock positions without the burden of capital gains?

If so, there’s an innovative strategy that might be the perfect fit for you: the 351 exchange.

This strategy allows you to contribute shares of a single stock, along with other shares or ETFs that have capital gains, in exchange for shares in a new ETF.

This approach offers several key benefits:

No Capital Gains: This strategy doesn’t trigger taxes on the gains.
Diversification: Seamlessly transition from a concentrated stock position to a diversified portfolio.
Immediate Liquidity: Unlike traditional 721 exchange funds, there is no seven-year lock-up period.
Cost Efficiency: Enjoy lower fees compared to other strategies, such as 721 exchange funds, or QOZ funds.

However, there are some constraints to follow:

But there are ways to get around these restrictions. Let’s consider a practical example.

How It Works:

Step 1: Contribute $20k of a single stock and $80k of a broad-based index fund ETF, such SPY. The individual stocks inside the ETF will all count and make sure we don’t exceed the 50% cap on the top 10 largest holdings.

In return, you receive ETF 1 valued at $100k.

Step 2: During the offering cycle, contribute an additional $25k of the single stock and $100k of ETF 1, resulting in ETF 2 worth $125k.

Step 3: During the next offering cycle, contribute $30k of the single stock and $125k of ETF 2 to receive $155k worth of ETF 3. 

Over the multi-step process, you’ve exited out of $75k of a single stock, and used $80k of other stocks/ETFs to end up with $155k in ETF 3.

ETF 3 is expected to be a diversified global portfolio of stocks, designed to replicate a strategy similar to Berkshire Hathaway, using the Shareholder Yield methodology, which combines Dividend Yield and Share Buybacks to invest in quality, cashflowing companies.

You keep your original cost-basis in the stock and ETF(s), but you are now globally diversified and have mitigated your single security/sector concentration risk without triggering capital gains.

This strategy integrates seamlessly into your existing portfolio while offering you the ability to strategically manage your capital gains. 

This process is manual and paperwork-intensive, and the next deadline is approaching quickly (11/30/2024). Although it’s expected to be offered on a quarterly basis, so don’t worry if you miss this opportunity.

If you’re interested in exploring this strategy further, please reach out to me as soon as possible. Let’s work together to optimize your portfolio and manage your capital gains effectively.

This is suitable for accredited investors with capital gains of at least $100k in any single stock.