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The ASX 200 stocks in the tax-loss selling firing line

losing money

The end of the financial year could complicate the recovery of some beaten down ASX shares.

These underperforming stocks on the S&P/ASX 200 Index (Index:^AXJO) may see the rebound in the share prices capped by shareholders looking to unload these losers for tax-loss purposes before the June 30 deadline.

If you aren’t already thinking about the tax implications for the financial year, you should be!

Waiting longer for a recovery

This is particularly so because the V-shaped economic recovery that many were hoping to see once the COVID-19 emergency passed is unlikely to materialise.

The debate is now focused on whether we will get a “U” or “L” shaped recovery instead. This means the short- to medium-term outlook for some coronavirus-impacted shares is likely to stay dim.

No point holding on to some of these losers if you can utilise the loss to offset your capital gains liabilities, especially if you think you can buy these laggards back later at a discount or around the same price.

What’s tax-loss selling?

For those who need a refresher on what tax-loss is, if you sell a stock below what you paid, the loss can be used to offset any profit you make on other investments.

For instance, if you made a loss of $100 on a stock and made a $100 profit on another, your capital gains liability is likely to be zero. You should check with your accountant to ensure you stay within the rules.

You should also note that the tax office takes a dim view of those who sell a stock for tax loss and then buy it back almost immediately. Again, be sure to speak to your tax professional for advice.

Poor foundations

But coming back to stocks that I believe make ideal tax-loss selling candidates, there are several that come to mind.

One stock that fits the bill is building materials group Boral Limited (ASX: BLD). The Boral share price was already under pressure before the COVID-19 disaster due to poor management that drove multiple profit downgrades.

The market’s patience ran out and this forced its chief executive Mike King to announce his departure in August.

The transition to a new leader usually marks a volatile period for shareholders. Newly installed chief executives of embattled companies almost always make dramatic cuts and changes that includes big write-down of assets.

A better option to Boral

If you are hanging on because you believe construction activity in the US and Australia will experience a speedy recovery, you probably would do better buying its better run rival James Hardie Industries plc (ASX: JHX).

Sure, you will be paying a premium for the switch, but you are getting a higher quality investment – and it’s particularly worth paying for quality during highly uncertain periods.

Weak properties

Another group of stocks that I think make good tax-loss selling targets are those own shopping malls and apartment projects.

I can’t see a V-shape recovery for this group and I am not swayed by arguments that their shares are trading below book value.

The problem is that there is lots of room to lower the value of their assets if structural changes to mega malls are afoot.

The outlook for apartment sales are also bleak as this segment of the property market is overly dependent on property investors and international students.

Examples of companies exposed to these thematic are Vicinity Centres (ASX: VCX), Stockland Corporation Ltd (ASX: SGP) and Mirvac Group (ASX: MGR).

Clipped wings

A third example of a stock that I see little reason to hang on to for the near term is Flight Centre Travel Group Ltd (ASX: FLT). The Flight Centre share price made a very decent 60% bounce since its March bottom and is ripe for tax loss selling for those who have been in the stock for a while.

Shares in the travel agent is still down close to 70% this financial year and international travel is one of the last few industries to return to “normalcy” (whatever that looks like in the post-coronavirus world).

Its cost base is also higher than online rivals as it operates brick and mortar shops. I reckon there’s time to buy back the stock later when more of the COVID-19 dust has settled.

The wild card is government support. There’s speculation that the federal government may extend a financial helping hand to industries most stricken by the pandemic.

However, I would rather back other travel related stocks if I wanted to take a punt on the government stimulus.

Where to invest $1,000 right now

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Motley Fool contributor Brendon Lau owns shares of James Hardie Industries plc. Connect with me on Twitter @brenlau.

The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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