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New Portfolio in 12 months - 1042 Rollover
Hello everyone.  Would welcome some feedback on my current portfolio and potential watch list along with any other insights.  My situation is somewhat unique in that I sold my portion of an engineering firm as part of an ESOP (Employee Stock Ownership Plan) in Feb. of 2017.  Within that transaction, as a C-Corp, the sellers are able to treat their sale under the 1042 rollover provisions and reinvest in Qualified Replacement Property (QRP) within 12 months and avoid capital gains taxation of let's say Fed/State of around 28-30%.  While this sounds like a fantastic opportunity it creates several challenges.

The first challenge was the simple fact that rarely do sellers of small businesses get 100% cash up front.  That leaves the remainder in interest bearing subordinated seller notes.  The second challenge is how to do you assemble a portfolio of 100% of the sales prices when you are lucky if you get 1/3 in cash at closing?  Third is the what constitutes QRP.  Its a pretty tight list.  US based, non-fund, non-REIT, non-muni, non-treasury stocks.  Essentially your large name blue chips along with corporate bonds and floating rate notes (FRNs).  And last but not least is that who would want to sell their No. 1 asset only to lock the entire sale down into a portfolio of even high quality DG stocks when there is no way to exit without incurring the cap gains taxation.  And at 41 that's a long time (hopefully!).  

In my case I've elected a portfolio of FRN's and equities.  I'm not crazy about the bond environment given my time horizon and the likelihood of rate increases.  My FRN's are purchased using a line of credit and have been formally transferred to Citi who now holds the assets and will monetize them at 90% value.  At death the basis is stepped up and the 10% held back will pass to heirs without cap gains taxation.  They will do the same on equities once assembled usually at around a 70% LTV.  The interest delta between what the notes earn and the monetization loan are both tied to LIBOR so they move together and will always be ~1 to 1.5 depending on the Note.  That's a tax deductible interest as it is part of an investment interest expense so it's a very manageable expense to avoid 30% taxation.

Which brings me to the purpose of this post.  I've been working since mid-summer to identify and purchase at least 50 stocks across 10 sectors (eliminating real estate by and large for the moment).  I'd like to generally be equally weighted and split between the sectors but I'm already a little heavy in staples because of the value they offered from the AMZN/WF deal late last year.  My struggle is I have to get this done by Feb 5, 2018 to qualify.  Which means buying headlong into the records it seems near daily.  I've been pretty patient and added on dips and opportunities.  Current portfolio has an average yield right at 4% (I want to stay above 3%) and return over the last 6 months of around 18%.  Keep in mind I may have these equities for the next 40 years.  There will rarely be selling opportunities unless there is a loss harvest I can use from time to time.  But generally speaking it is a forced buy and hold.  The dividends will be used to offset the cost of the aforementioned loan and not dripped.  The total required equity investment as part of this 1042 QRP is $550k and I'm about half way to that goal.  

I am really under invested in Financials, Industrial and Materials.  Current portfolio:


I'll post my target names shortly but I wanted to see what feedback might be out there.  Thanks so much, look forward to the discussion.  

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New Portfolio in 12 months - 1042 Rollover - by coffeyman76 - 01-01-2018, 09:09 PM

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