Explore alternative assets to reduce tax liability and boost your portfolio’s efficiency

The capital allocated to alternative assets is booming—rising from $5.3 trillion a decade ago to an expected $24 trillion by 2026.

And it’s easy to see why, as alternative assets can offer unique opportunities to build tax-efficient portfolios. 

In today’s article, we’ll explore strategies, asset types, and common mistakes to help accredited investors maximize tax efficiency.

Why Tax Efficiency Matters for Accredited Investors

Taxes can take a big bite out of returns for high-income investors, which is why tax efficiency is so important for long-term wealth building. 

Because accredited investors like you will often face higher tax rates, finding ways to reduce taxable income can let you hold on to more of your hard-earned returns.

Tax-Advantaged Alternative Assets to Consider

Different alternative assets can offer you different tax benefits:

• Real Estate and REITs

When you invest in real estate or REITs, you can benefit from depreciation, which lets you deduct the property’s loss in value over time (even though it may actually be appreciating). This deduction can offset taxable income, which can reduce the taxes you owe on rental income or REIT dividends.

• Qualified Opportunity Zones (QOZs)

By reinvesting capital gains into QOZ projects, you can defer those gains and, if held long enough, potentially not have to pay taxes on any additional appreciation.

• Private Equity

Many private equity deals use pass-through entities, such as partnerships, to pass income and deductions directly to investors, reducing your overall taxable income.

• Small Business Finance Notes

You can add Supervest’s Small Business Finance notes into a 401(k) to make the most out of tax-deferred growth. By deferring taxes, you allow the entire investment, including any earnings, to grow without immediate tax deductions eating into your returns. 

This means you can reinvest a larger amount each year, leading to compounding growth that can boost your overall gains over the long term.

If you want to know which alternative asset best suits your own investment style, click here to take our free interactive quiz.

How You Can Structure a More Tax-Efficient Portfolio

One way to reduce taxes is by placing high-yield investments, like REITs, in tax-advantaged accounts, while holding growth-focused stocks in taxable accounts to take advantage of lower long-term capital gains rates. 

Another useful strategy is timing your asset sales. Selling your underperforming investments can offset gains through tax-loss harvesting, while holding assets longer often reduces capital gains taxes.

How You Can Avoid Costly Mistakes in Tax-Efficient Investing

Steer clear of these mistakes that can affect your portfolio’s tax efficiency:

• Overlooking holding periods 

Short-term gains are taxed at higher rates than long-term ones. Imagine Emma, an investor who sold her private equity shares after 11 months. By selling too soon, she paid a 35% tax rate instead of the 15% she would have qualified for if she had waited just one more month.

• Neglecting compliance rules

Ignoring IRS regulations, such as those for Qualified Opportunity Zones, can result in losing out on potential tax benefits. 

For example, failing to meet the required holding period for a QOZ investment could mean losing the chance to eliminate taxes on capital gains earned within the zone.

What Can I Do Now?

Today, we’ve explored how accredited investors can build tax-efficient portfolios by using alternative assets and avoiding common pitfalls. 

Ready to take the next step? Explore our educational resources, or try one of our interactive quizzes to find more ways to optimize your investment strategy.