Private markets have consistently outperformed public markets over longer investment periods, delivering higher returns and lower realized volatility to investors’ portfolios. These advantages have made them a core consideration for advisors seeking to elevate client outcomes — a benefit emphasized during turbulent years like 2021.
But the benefits don’t stop there. Certain private market investments can also offer meaningful tax benefits that traditional asset classes like stocks and bonds simply can’t. For high-net-worth investors — particularly those in high-tax states where marginal tax rates can exceed 50% — these tax efficiencies are critical to preserving and compounding wealth.
As the passage of some form of President Donald Trump’s tax and spending bill becomes more likely, advisors need to align client portfolios with private market strategies that not only generate attractive returns but also account for an evolving tax landscape. Understanding private investment opportunities on a risk- and tax-adjusted basis is essential to client success and, by extension, that of the advisor.
Here are four targeted approaches to minimize client taxes that advisors can take in today’s environment.
1. Private Credit Strategies Leveraging Tax-Exempt Issuances
Qualified private activity bonds offer a tax-advantaged financing structure for private credit strategies by enabling tax-exempt interest income to lenders or investors. These bonds fund affordable housing, green infrastructure, waste and water treatment, and other eligible facilities and are often issued through arrangements with municipalities.
Because the interest income from these bonds is exempt from federal taxes (and sometimes from state taxes), borrowers benefit from a lower cost of capital, and investors can access higher after-tax yields, which are especially attractive in higher-tax environments.
For example, the financing for the construction of a new building at a charter school or private mortgage of an affordable housing development may be federally tax-exempt, providing investors with an unlevered 6% to 8% annual yield while keeping most of that income after tax. By comparison, traditional high-yield bonds paying 6% to 8% yields would be fully taxed, cutting the net returns to high-income clients in half.
2. Value-Add Real Estate With Tax-Efficient Distributions
Real estate strategies that employ accelerated depreciation, cost segregation, and eligibility for federal and state tax credits can also deliver high returns on an absolute and tax-adjusted basis. More specifically, investments in low-income housing developments and redevelopment strategies that incorporate energy-efficient investments may qualify for incentives such as the Low-Income Housing Tax Credit, Section 45L tax credit or 179D deductions.
These strategies can produce strong cash flows while offsetting taxable income, making them highly attractive to investors seeking long-term compounding with minimized tax exposure. Income distributions from rental property that would typically be taxed at ordinary income rates can be reduced through capital improvement expenses like solar panels, heat pumps or energy-efficient appliances that add value to the property when sold, and ultimately generate higher, more tax-favored returns to investors.
3. Operating Business Investments With Real Asset Backing
Similarly, private investments in operating businesses — particularly those with significant real estate or intangible asset bases — can generate tax-efficient income through depreciation, amortization of goodwill and disciplined expense timing.
Structuring investments through pass-through entities allows income and taxable income offsets to flow directly to investors in the most tax-efficient means possible. This approach can produce robust distributions that are partially or entirely shielded from taxes, making it a valuable complement to more traditional private equity or income-generating assets.
For example, a retail or restaurant business that operates out of owned real estate may be able to distribute income on a largely tax-free basis, once accounting for noncash depreciation expenses on both the property and any equipment owned.
4. Leveraging Retirement Accounts for Less Tax-Efficient Strategies
Lastly, even those strategies that generate ordinary income or short-term capital gains — like traditional balance sheet or asset financing, high-turnover trading strategies or risk transfer financing — can be made more tax-efficient by isolating those assets within deferred accounts, such as individual retirement accounts or specialty wrappers like private placement life insurance.
By housing those strategies in tax-deferred or tax-exempt structures, advisors can help clients minimize tax impacts, enhance diversification and fully unlock the compounding effects of these strategies over time.
James Ouderkirk is executive director of GLASfunds, a global alternative investment platform offering access to institutional-level private capital and hedge funds.
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