Concept · Funds, wrappers and fees
What is an exchange fund?
Direct answer A partnership that takes in concentrated stock positions from many investors, each of whom receives units representing a slice of the whole pool, with no gain recognized under IRC §721. The fund must hold at least 20% in non-marketable assets, usually real estate, and investors wait seven years before redeeming in kind at their original basis.
Fees run 0.4% to 0.95% a year plus a placement charge of up to 1.5% at some sponsors. About 2% a year of underperformance over the seven years erases the tax benefit. It is the tool for a single stock that cannot pass Section 351’s 25% test. Read exchange funds, for one big stock.
Sources
- IRC §721law.cornell.edu
- Kitces, exchange funds for concentrated positionskitces.com
Used in