FEDERAL GOVERNMENT SANCTIONED TAX-FAVORED INVESTMENT
Qualified Opportunity Funds … Convert Long-Term Capital Gains to Tax Savings
Touted by many as the most generous tax incentive of this type ever offered, the Tax Cuts and Jobs Act (TCJA) provides for investment in Qualified Opportunity Funds (QOF) … essentially low-income communities. The intent is to motivate investors with realized capital gains to invest those profits in QOFs and thereby defer, minimize or eliminate taxes on those returns.
Here’s a quick summary of the fourfold benefits of investing in a QOF:
• There is no cap on the amount of capital gains proceeds that may be invested;
• Capital gains are deferred
• When the investment is held for five to seven years, ten to fifteen percent of the capital gain is forgiven.
• Investments held for ten years may receive permanent exclusion of gain.
Note: Investors will pay tax on the deferred gain when they sell the QOF investment. Mandatory gain has to be recognized at the end of 2026 even if the investment remains unsold. So there is a sense of urgency … to enjoy the seven year fifteen percent “forgiveness” means the investment must be made before the end of 2019.
So let’s take a look at a hypothetical capital gain of $100,000 (just to make the math easy). Based on the above description it may look like this.
• Do nothing … pay taxes on capital gain of $100,000
• Invest in a QOF … capital gain deferred - at end of 5 years, taxable capital gain reduced by 10% = $90,000
• Invest in a QOF … capital gain deferred - at end of 7 years, taxable capital gain reduced by an additional 5% = $85,000
• Invest in a QOF … and hold for 10 years, taxable capital gain = zero!
Formation of a qualified opportunity fund may be organized as a corporation or partnership that invests at least ninety percent of its assets in QOFs. Investors have 180 days from the sale of an appreciated asset to invest in the fund and receive either stock or an interest in the business entity.
Over 8,700 QOFs have been designated across the U.S. which creates a huge opportunity for investors seeking relief from some or all capital gains taxes. For a complete listing of designated QOFs as well as map locations, click on the CDFI Fund logo above.
For investors with significant capital gains during 2018 or anticipated in 2019, now is the time to consider the potential tax savings of an investment in a qualified opportunity fund. If that describes you and your desires, now is the time to meet with your tax advisor to determine how you may benefit.
As the old saying goes, “There’s always more to the story” … especially as the new regulation may apply to your unique circumstances.
Planning is the No. 1 thing we do at Blair + Assoc for clients to minimize taxes and maximize net income. The above article is but one consideration for taxpayers to be aware as we approach end-of-year tax planning.
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