Corporate bonds produce investment income; stocks that pay no dividends do not, until sold for a capital gain. “Invest income-producing assets in tax-deferred vehicles such as IRAs and keep the most tax-efficient investments in taxable accounts,” Lee said.
“Tax-exempt interest is not subject to the NIIT. Many wealthy taxpayers have reduced their regular taxes and investment income taxes by shifting more of their portfolio to tax-exempt municipal bonds,” DiBenedetto added.
According to Brandenburg, these strategies can help defer or avoid taxes on investment income:
• Like-kind exchange in real estate. Called a Section 1031 exchange or a Starker exchange, this allows the gain from real estate to be sold and the proceeds reinvested into another property.
• Borrow against the value/equity of appreciated property. This allows the investor to obtain cash on the appreciation in their investment without recognizing a tax cost.
• Harvest losses. For investments that have declined in value, consider selling to recognize the losses, which could then offset other investment gains.