Taxpayers with capital gains reported on a 2018 Schedule K-1, or that have net capital gains on all 2018 sales of section 1231 property (property used in a trade or business), have until June 28, 2019, to take advantage of potentially significant tax deferral by reinvesting those gains into a qualified opportunity fund (QOF). If you have not yet discussed this deferral and savings strategy with your tax advisor, we encourage you to do so soon.
Investing in a QOF potentially defers payment of the capital gains tax until 2026, plus a 15 percent permanent exclusion of the original gain if the QOF investment is held for seven years. It then allows for tax-free gains on any appreciation of the QOF investment if held for 10 years.
It is critical to note that once the original deferred gain is recognized, it will be taxed at the federal capital gains rates in effect at the time of recognition (2026 assuming full deferral), not at the time of deferral.
As an illustrative example, a $250,000 2018 capital gain would result in a current federal tax liability of $59,500. By reinvesting the gain in a QOF, payment of tax is deferred. Assuming the investment is held for seven years, 15 percent of the gain is excluded from income and 85 percent of the remaining gain, $212,500, would be subject to tax in 2026 at capital gains rates that are applicable at that time. Once the QOF investment is held for 10 years, any gains realized from any QOF are tax-free.
If you’re interested in possible gain deferral from reinvesting 2018 gains into an opportunity zone, we encourage you to contact your Baker Tilly advisor for additional details.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.