Advanced Tax-Aware Investments

A collection of strategies to help business owners keep more of their wealth.

Key numbers

The strategies in this section go beyond the basics. They're not for everyone, and that's the point — they come with minimums, lockups, or structural requirements that make them appropriate only at certain wealth levels or in specific circumstances. Rule #1 still applies: the complexity has to pay for itself.

1. Direct Indexing

Direct indexing means owning the individual stocks that make up an index — say, the S&P 500 — rather than a single fund. You get the same broad market exposure, but because you own each stock individually, you can harvest losses on stocks that decline even when the overall index is up. In a given year, dozens of index components might be down even if the index itself gained 15%. A fund can't realize those individual losses. Direct indexing can.

The benefit is systematic, ongoing tax-loss harvesting at a granular level. At a combined rate of roughly 37%, every dollar of losses harvested saves roughly 37 cents. At scale — say, a $1M+ taxable portfolio — this can add 0.5–1.5% of after-tax return per year. Direct indexing programs typically charge 0.2–0.4% in management fees. It becomes less valuable over time as the portfolio's cost basis is driven down through harvesting. See the Direct Indexing guide for the full breakdown.

2. Long/Short Tax-Aware Strategies

A step beyond direct indexing: a separately managed account that takes both long positions (securities you expect to rise) and short positions (securities you expect to fall), specifically designed to generate tax losses for harvesting while maintaining market exposure. These are institutionally structured, expensive, and typically require $2M+ to implement meaningfully. Most investors don't need them.

3. Section 351 Exchange

A 351 exchange lets you transfer appreciated property — including appreciated stock — to a corporation you control without triggering a taxable gain, as long as you (and others contributing) end up owning at least 80% of the corporation. The tax on the appreciation is deferred, not eliminated; your basis in the corporation equals what your basis was in the contributed property.

It's rarely the right tool. The transferred assets become corporate property, making them harder to access and creating new tax complications. The most legitimate use case is contributing appreciated assets to a new operating business you're actually running.

4. Opportunity Zones

Qualified Opportunity Zone (QOZ) funds let you invest capital gains — within 180 days of realizing them — into designated low-income census tracts. More importantly, if you hold the investment for 10+ years, any appreciation inside the fund is completely tax-free.

The appeal is real, but so are the risks. QOZ funds are illiquid for 10 years, the underlying investments are often in underdeveloped areas with real execution risk, and fund sponsors have historically charged high fees. The math on the tax benefit needs to beat the lower-quality investment plus the fees plus the illiquidity penalty. Underwrite the deal first; don't let the tax tail wag the investment dog.

5. Exchange Funds

Exchange funds pool your appreciated shares with other investors' positions into a partnership. You receive an interest in a diversified portfolio without triggering a sale. The IRS requires a 7-year minimum lockup, and most funds require $1M+ per participant. If you have a large, low-basis concentrated position and can tolerate the illiquidity, it's one of the cleanest diversification tools available.