How Trump’s rich cabinet members could save millions thanks to a little-known tax break

The cabinet for Donald Trump’s first term was the richest in US history. His next cabinet may prove even richer.

For Commerce Secretary, he is reportedly about to nominate Howard Lutnick, the billionaire CEO and majority owner of financial services firm Cantor Fitzgerald. Major Trump donor and fracking company CEO Chris Wright has been nominated for Secretary of Energy.

Two of the reported candidates for Treasury Secretary made their fortunes on Wall Street, including billionaire Apollo CEO Marc Rowan.

Executives leaving their private sector careers behind to take a role in the new administration can take advantage of a lucrative tax loophole once they get Senate approval. Eligible federal appointees can defer capital gains taxes indefinitely when they sell stock or other assets in order to avoid a conflict of interest. To reap the benefit, the proceeds must be reinvested within 60 days in either government securities like Treasury bonds or diversified investment funds.

This policy, dating back to the first Bush administration, is intended to spare appointments from incurring big tax bills to join the civil service. It’s a lucrative perk for executives with highly concentrated stock positions. In 2006, ex-Goldman Sachs CEO Henry Paulson deferred an estimated $200 million in taxes when he sold off $500 million in stock to serve as Treasury Secretary under George H.W. Bush, according to The Economist.

“Without a doubt, this is very much an incentive,” said Bob Willens, a tax professor at Columbia Business School. “You’ve got an opportunity to achieve what amounts to a tax-free diversification of your concentrated investment in your employer.”

Lutnick and hedge fund mogul Scott Bessent were originally seen as Treasury Secretary frontrunners. Now, Trump is reportedly eyeing Rowan and Kevin Warsh, a former Morgan Stanley banker and ex-Federal Reserve Board governor. Warsh is married to billionaire cosmetics heiress Jane Lauder.

Most of Rowan’s $8.8 billion net worth is tied up in his 6.1% stake in Apollo. If he were nominated and appointed, he, his wife, and any minor or dependent children could take advantage of this carveout. (The private equity firm declined to clarify whether Rowan would take the role or how he would divest his 34 million-plus shares.)

Here is an example of how the tax break can work.

Consider a cabinet pick who owns 100,000 shares worth $100 each. They originally bought the shares for $10 each. Now, they must sell those shares to serve. The capital gain is $9 million.
As a top earner in New York, they would normally have to pay more than $3 million in capital gains taxes. Instead, they can reinvest that $9 million in Treasury bonds and mutual funds. They do not have to pay any taxes unless they sell their new portfolio. The sum that would have been spent on capital gains taxes is now free to compound and grow.

There are a few caveats. Appointees who sell the reinvested asset have to pay capital gains taxes on the appreciation since the original investment. They can live off their investments without selling by taking loans against their portfolios. If they have to sell and incur taxes, they still see a benefit as the original proceeds have grown tax-free.

“It’s really costing you less, assuming you’re doing something other than leaving it under your mattress,” said lawyer Ed Renn of Withersworldwide.

Nominees can negotiate other options with the Office of Government Ethics, such as putting assets in a blind trust. Former Commerce Secretary and billionaire heiress Penny Pritzker chose to recuse herself from matters that could impact her Hyatt stock and divested from 221 other holdings.

“The OGE is very capable, and they do look to put together their certificate of divestiture and work with the incoming individual to come up with a game plan that makes sense,” said Mark Parthemer, chief wealth strategist at Glenmede.

The IRS allows investors to defer capital gains taxes in other scenarios that are deemed outside their control. For instance, according to Willens, an investor with a condemned property who receives insurance or condemnation proceeds that incur capital gains taxes can defer those taxes by reinvesting the proceeds in a replacement property.

“When your property is condemned or destroyed or seized or requisitioned and you realize a gain, it was felt that you ought to be able to defer the gain,” Willens said. “This provision is based on that exact theory that certain involuntary gains shouldn’t be taxed as long as you comply with the reinvestment requirements.”

Moreover, the incentive has an ethical purpose, Renn said.

“I don’t think it’s unfair or unsavory,” he said. “I think we should take comfort in the fact that folks have to do this and that we’re setting up for hopefully fewer conflicts.”