I had a call recently with a partner at a PE firm. His numbers:
- ~$5M of carry / capital gains
- ~$10M existing portfolio
- ~$200K ordinary income
- ~$300K passive income
He basically has every kind of tax problem at once: capital gains, active income, and passive K‑1 income.
Here’s the plan I walked him through.
1️⃣ Avoid capital gains taxes on the carry/capital gains
He has a big long‑only direct index account we can upgrade to tax-aware long-short SMA.
Why:
- Maintain equity exposure
- Target better pre‑tax returns
- Harvest enough capital losses to offset the carry on his return
The long/short SMA becomes the engine that reduces capital gains for the rest of his career.
2️⃣ Avoid taxes on the active income (Plus Roth conversions)
Adding tax-aware hedge funds diversify the portfolio and will pass roughly $500k of ordinary deductions a year.
That lets him:
- Offset his $200K of ordinary income, and
- Create room for ~$300K of Roth conversions at little or no net tax
Once in the Roth, those assets grow tax-free forever.
3️⃣ Avoid taxes on the passive income
We can allocate to tax‑aware real estate with mid‑teens net, after‑tax return potential.
On the sizing we discussed, he can expect roughly $425K of passive losses in year 1:
- That covers the $300K of passive income
- Banks extra PALs for future years
To avoid capital gains and depreciation recapture, we’ll do 1031 exchanges until an eventual step-up in basis at death.
4️⃣ Legacy planning
With conversions happening, we earmarked the Roth IRA for his kids.
The time horizon isn’t just his life; it’s his heirs’ 10‑year window after they inherit the Roth.
We prioritize the highest expected return investments here.
At 12% annual compounding, money roughly 3x’s every 10 years.
At 15%, it roughly 4x’s every 10 years.
If you’re a PE partner with carry, complex income streams, and $5M+ to your name, this is exactly the kind of planning I build.