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Re-investing Capital Gains to Defer (and exclude some) Tax

Learn about the tax benefits of Qualified Opportunity Funds (QOF) and how they can help defer capital gains taxes. Discover the requirements, benefits, and potential pitfalls of investing in businesses located within Qualified Opportunity Zones (QOZ).

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Re-investing Capital Gains to Defer (and exclude some) Tax

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  1. Re-investing Capital Gains to Defer (and exclude some) Tax A primer of the Qualified Opportunity Funds created by the Tax Reform Act of 2017

  2. Qualifed Opportunity Funds (QOF) • Entities established for the purpose of investing in businesses located within Qualified Opportunity Zones (QOZ) • Must be a partnership or corporation • Could be a closely-help or sole shareholder corporation

  3. Qualified Opportunity Zones • Designated by the State as being areas with “Low Income Communities” • Map all QOZs can be found at https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

  4. Highlights of the Tax Benefits • “Deferred Gain Investment” (DGI) • Capital Gains (CG) that would otherwise have to be recognized now can be re-invested into a QOF and the recognition is deferred to the earlier of: • Sale of interest in QOF • December 31, 2026 • If held for at least 5 years, DGI’s exclude 10% of the initial CG • If held for at least 7 years, DGI’s exclude 15% of the initial CG • Must re-invest by December 31, 2019 in order to get this full benefit

  5. Highlights Cont. • If DGI is held for at least 10 years, then all further appreciation of the initial DGI is excluded from CG • This is the greatest unknown at this time, however, since the QOZs expire on December 31, 2028, so if the DGI has not already been made it could possibly not meet the 10-year minimum

  6. Example • This year, you sell a business or some other capital asset that resulted in a realization of $1,000 in Capital Gain (CG) • Side note – this could be Long Term or Short Term CG and still be eligible for the deferral, but STCG retains it’s character even if held for a LT in the DGI • You re-invest in a QOF this year (this is your DGI) and pay no tax on the CG for now (which would have been $150) • If you sell after 5 years, 10% of the CG is excluded from tax (you pay $135, saving you $15 permanently) • If you sell after 7 years, 15% of the CG is excluded from tax (you pay $127.50, saving you $22.50 permanently) • Keep in mind, however, that at this point any appreciation beyond the initial DGI is taxed at the full CG rate

  7. Example cont. • If you sell after 10 years, 15% of the initial DGI is excluded from tax PLUS all appreciation from the date of the initial DGI • Although I cannot caveat enough that this is still very uncertain!

  8. QUESTIONS?

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