The Stacking Strategy: How Intelligent Allocation Can Create Better Tax Outcomes

The biggest tax opportunities may not exist within a single investment or strategy, but in how we make them work together. 

A couple in their early 60s recently came to us after experiencing the kind of liquidity event that changes a family’s life. For nearly 30 years, they had built a business together, with most of their wealth tied up in the company. Then they sold it, and almost overnight, decades of work turned into a very large number on a statement. 

With the sale came a significant capital gain and a tax bill unlike anything they had dealt with before. They already had an experienced tax team around them, and the advice they received was surprisingly simple: Pay the tax. 

That may ultimately be the right answer for some of it. There are times when paying the tax is a much better decision than forcing money into an investment simply because it comes with a tax benefit. But they wanted to know if there was more they should be considering. 

Our starting point was different. We wanted to make intelligent allocation decisions that also happened to have attractive tax characteristics. Which taxes could intelligently be deferred or offset? Which simply needed to be paid? And how could we put the remaining capital in the best position to compound over the next several decades? 

At South Coast, we call this approach Stacking. Stacking is the idea that one intelligent allocation decision can create an opportunity somewhere else on the balance sheet. 

One strategy gives us time 

For this family, two strategies fit particularly well. 

Under the new Qualified Opportunity Zone framework, or QOZ 2.0, an investment in a Qualified Opportunity Fund could potentially allow us to defer a portion of an eligible capital gain for five years. A tax-aware long/short strategy could give us more opportunities to harvest capital losses during that same period. 

One strategy gives us time. The other gives us more opportunities to harvest losses during the time. 

Opportunity Zones aren’t new, but the version beginning in 2027 is meaningfully different. Under QOZ 2.0, qualifying investments generally receive a rolling five-year deferral period. After five years, investors can receive a 10% basis increase on the original deferred gain, with qualifying rural Opportunity Funds potentially receiving a 30% basis increase. If the investment satisfies the applicable requirements and is held for at least 10 years, qualifying appreciation can potentially be excluded from federal capital gains tax. 

There is also an important opportunity for investors realizing gains today. Because investors generally have 180 days to make a qualifying QOF investment, certain gains realized in the latter part of 2026 can have an investment window extending into 2027 and potentially qualify under the new framework. 

But the investment still has to earn its place in the portfolio. 

In this case, the QOF we identified focuses on multifamily real estate. The family had spent decades with much of its wealth concentrated in one private business and didn’t have a meaningful real estate allocation. We also like the current supply backdrop. According to Blackstone’s 2026 real estate research, U.S. multifamily construction starts are more than 60% below their 2022 peak. 

The QOF gives us an opportunity to add an asset class we already want to own while potentially improving the family’s tax outcome. 

Five years is a long time 

Most people hear “tax deferral” and think about paying the same tax later. I look at it differently because the five years themselves have value. 

If we know a deferred capital gain may be coming back onto the tax return five years from now, why would we spend those five years simply waiting for it? 

A tax-aware long/short strategy can give us more opportunities to harvest losses than a traditional long-only portfolio. Individual positions can decline even while the overall portfolio produces a positive return. Those positions can potentially be sold to realize losses while maintaining the portfolio’s broader investment exposure, and unused capital losses can generally be carried forward. 

There are no guarantees. The losses available will depend on markets, portfolio management and the family’s individual tax situation. But instead of simply deferring a tax liability and waiting five years to deal with it, we’ve created five years to plan for it. 

Put the two together 

Consider a hypothetical investor with a $10 million eligible capital gain. Assume $5 million is invested in a qualifying QOF and another $5 million is allocated to a tax-aware long/short strategy. 

The QOF potentially defers recognition of the $5 million eligible gain for five years and may provide additional tax benefits if the applicable holding requirements are satisfied. 

Meanwhile, the other $5 million isn’t sitting around waiting for the tax bill. It’s invested. If the long/short strategy can harvest capital losses during those five years, those losses may accumulate as carryforwards that could potentially offset some of the deferred gain when it is ultimately recognized. 

We aren’t asking a manager to manufacture a predetermined amount of losses, and we don’t know what markets will give us. What we do know is that we’ve created five years to work with. 

That is the part I think advisors should pay attention to. The value of the QOF isn’t limited to what happens inside the QOF. The deferral creates an opportunity somewhere else on the balance sheet. 

The opportunity is between the strategies 

QOZ 2.0 and tax-aware long/short happen to fit particularly well for this family, but there is no universal Stack. 

For another family, charitable planning may play a larger role. A family with significant estate tax exposure may have an entirely different set of opportunities. An investment decision can create an opportunity for the CPA. An estate planning decision may change how we want to own an investment. 

The point isn’t for the advisor to become the CPA or estate planning attorney. It’s to make sure everyone is looking at the same picture. 

And there is one rule that shouldn’t change: The investment has to work first. 

No amount of tax savings can rescue a bad investment. Deferring a capital gain doesn’t help much if the underlying investment permanently impairs the capital, and generating tax losses isn’t particularly valuable if the strategy itself produces a poor investment outcome. 

The family came to us asking how they could save on taxes. The answer wasn’t one product, one deduction or one clever transaction. Some of the tax bill may still need to be paid, and that’s okay. 

The opportunity was to make better decisions across the entire balance sheet and understand how one decision could create another opportunity somewhere else. 

That’s the question I think advisors should be asking more often. 

Not simply, “What strategy solves this problem?” 

But, “If we make this decision, what else does it allow us to do?” 

That’s Stacking. 

^{Disclosures: The family described is a composite illustration based on planning situations we encounter. Certain facts have been combined or changed for illustrative purposes.} 

^{This material is for educational purposes only and is not investment, legal or tax advice. Qualified Opportunity Funds, private real estate and long/short strategies involve risks, including illiquidity, leverage, short selling and potential loss of principal. Tax benefits depend on applicable law, individual circumstances and satisfaction of statutory requirements, which may change. Tax-loss harvesting depends on market conditions and does not guarantee losses will be available to offset a particular gain. Diversification does not ensure a profit or protect against loss. Investors should consult their tax and legal professionals regarding their individual circumstances.}