Invest in a Qualified Opportunity Fund! Do it Before December 31 this Year for the Maximum Benefit !!
12/17/2019
A significant capital gain tax bill can take the shine off selling a successful, appreciated asset as the post-tax return on investment is notably diminished. Qualified Opportunity Funds (QOF) allow investors to trade off immediate liquidity for tax deferral, reduction and elimination. A QOF is a win-win for the investor and community alike, the tax deferral component allows investors to invest more initially and pay the tax later, thereby allowing their QOF investment to be greater than it would otherwise and communities in need across the nation benefit from targeted investment into local infrastructure and property projects.
Background
In the 2017 Tax Cuts and Jobs Act, Congress created the QOF as a tax incentive to motivate investments in low-income communities. This incentive allows investors to defer federal taxable capital gains by making an investment in a QOF. Two subsequent regulations, published in October 2018 and April 2019 respectively, provided tax-break clarity and guidance to investors, thereby ensuring a confident and stable investing environment.
What is a QOF?
A QOF is an investment vehicle designed to provide new capital investment in real estate or businesses located in census tract areas designated as Qualified Opportunity Zones (QOZs). There are 8,764 designated QOZ’s through-out the United States.
Why invest in QOFs?
Taxpayers who have current taxable capital gains and invest an amount equal to the capital gain in a QOF receive a deferral of paying the tax on the gain until the earlier of selling or exchanging their investment or December 31, 2026. Let’s assume during 2019 you sell stock for a capital gain of $100,000 and invest an equal $100,000 into a QOF. You defer paying the tax on the $100,000 capital gain until the earlier of the time you sell or exchange your investment or December 31, 2026. A taxpayer is not required to invest all their gain proceeds in the QOF, however, any amount of the gain not invested would be subject to tax today.
A bonus to taxpayers who invest in a QOF is that if you hold your investment for at least 5 years you receive a 10% decrease in the deferred gain. Furthermore, if you hold your investment for 7 years in total, you receive another 5% decrease for a total of 15%. In the case of our example, this would mean the capital gains tax due in 2026 is applied to $85,000 instead of the invested $100,000. In order to receive the maximum step-up in basis on deferred gains of 15%, the investment must be made on or before December 31, 2019.
When do you have to invest?
Timing of investing in a QOF is critical; taxpayers have 180 days from the sale or exchange to invest in a QOF. Taxpayers who receive a K-1 that reports a Section 1231 gain have 180 days after the year end of the entity’s tax year to invest in a QOF.
Added bonus for taxpayers:
Taxpayers who hold their investment in the QOF for at least 10 years can elect to permanently exclude their gain on the QOF investment. This permanent exclusion only applies to the gain in excess of the deferred gain above.
QOFs are an exciting opportunity for taxpayers to trim their capital gain obligation, receive short term, medium term and long-term tax benefits and generate a return whilst channeling capital into under-served communities across the USA. Investment options are predominantly real estate based, but also include renewable energy and are offered from some of the most prominent asset managers in the country.
Please talk to the RINA Wealth Management team and invest before the close of 2019. You're invited to contact Roshan Weeramantry, Director, RINA Wealth Management Services LLC, at 510-873-0950 or rweeramantry@rinawealth.com.
Background
In the 2017 Tax Cuts and Jobs Act, Congress created the QOF as a tax incentive to motivate investments in low-income communities. This incentive allows investors to defer federal taxable capital gains by making an investment in a QOF. Two subsequent regulations, published in October 2018 and April 2019 respectively, provided tax-break clarity and guidance to investors, thereby ensuring a confident and stable investing environment.
What is a QOF?
A QOF is an investment vehicle designed to provide new capital investment in real estate or businesses located in census tract areas designated as Qualified Opportunity Zones (QOZs). There are 8,764 designated QOZ’s through-out the United States.
Why invest in QOFs?
Taxpayers who have current taxable capital gains and invest an amount equal to the capital gain in a QOF receive a deferral of paying the tax on the gain until the earlier of selling or exchanging their investment or December 31, 2026. Let’s assume during 2019 you sell stock for a capital gain of $100,000 and invest an equal $100,000 into a QOF. You defer paying the tax on the $100,000 capital gain until the earlier of the time you sell or exchange your investment or December 31, 2026. A taxpayer is not required to invest all their gain proceeds in the QOF, however, any amount of the gain not invested would be subject to tax today.
A bonus to taxpayers who invest in a QOF is that if you hold your investment for at least 5 years you receive a 10% decrease in the deferred gain. Furthermore, if you hold your investment for 7 years in total, you receive another 5% decrease for a total of 15%. In the case of our example, this would mean the capital gains tax due in 2026 is applied to $85,000 instead of the invested $100,000. In order to receive the maximum step-up in basis on deferred gains of 15%, the investment must be made on or before December 31, 2019.
When do you have to invest?
Timing of investing in a QOF is critical; taxpayers have 180 days from the sale or exchange to invest in a QOF. Taxpayers who receive a K-1 that reports a Section 1231 gain have 180 days after the year end of the entity’s tax year to invest in a QOF.
Added bonus for taxpayers:
Taxpayers who hold their investment in the QOF for at least 10 years can elect to permanently exclude their gain on the QOF investment. This permanent exclusion only applies to the gain in excess of the deferred gain above.
QOFs are an exciting opportunity for taxpayers to trim their capital gain obligation, receive short term, medium term and long-term tax benefits and generate a return whilst channeling capital into under-served communities across the USA. Investment options are predominantly real estate based, but also include renewable energy and are offered from some of the most prominent asset managers in the country.
Please talk to the RINA Wealth Management team and invest before the close of 2019. You're invited to contact Roshan Weeramantry, Director, RINA Wealth Management Services LLC, at 510-873-0950 or rweeramantry@rinawealth.com.