Even though I took my leap of faith over a week ago, some of the funds from my Beneficiary IRA transfer have only now hit my Interactive Brokers account. Since IB doesn’t support most of the mutual funds I held, the rest of the funds are going to take a few more days, which means I only have $25K in cash at the moment. Maybe I should have waited for the rest of the funds to transfer? IDK I figured I’d go ahead and get some income going.
First order of business is to get the REIT shares out of the taxable account. I have 400 shares of VER, and 26.6757 shares of HCP in my taxable brokerage account. Dividends from these REITs are unqualified, meaning they’re taxed as regular income rather than capital gains. That is a major hindrance to the real yield they produce. I like the investments and the income, I’m just holding them in the wrong type of account.
This is kind of like my Gilead switcheroo except in reverse. My goal is to buy an equivalent number of REIT shares in tax protected accounts because of the relatively large amount of dividend income they produce. Unlike the Gilead switcheroo, I don’t want to sell the original shares for a gain, since I would have to pay taxes on that gain. Fortunately? (yeah..fortunately for the purposes of this scheme)…my VER investment only recently got close to break even range and HCP is down about 17%. So as long as I wait long enough to avoid wash rule issues, I can do a little tax loss harvesting, and transfer the dividend income to a protected account.
My theory is that the REIT share prices might drop in June if the FOMC decides to push another rate hike through at their next meeting. So I don’t want to just buy shares now, or try to gaff fish with a limit order. Instead, I’ve decided to sell put options at a strike price that would effectively lower my cost basis. Meanwhile I collect the option premium as income and if the share prices fall, I can make my switcheroo at a lower cost basis.
Take this trade with VER as an example. My current cost basis is $9.40. By selling July 15 puts for $0.25/share with a strike price of $9.00 I earn a 19.13% annualized gain (2.78% actual gain over 53 days) with the premium. If I get assigned, I will lower my cost basis by $0.40/share, and hold the shares in a tax advantaged account. If I don’t get assigned, I keep my premium and do it again. VER has been down the past couple of days, so the prices of put options were up. I’m waiting for HCP to have a couple down days before I try a similar maneuver. I’m especially interested in the HCP $30.00 strike right now.
I sold 4 put contracts at $0.25/share, which netted me $99.88 in premium (including commissions…IB is awesome!). Meanwhile, I’m expecting a $55.00 dividend distribution from the 400 shares I own outright.
How sweet is that? Why didn’t I do this sooner?