RINA’s year-end tax planning alert mentioned that Qualified Opportunity Zones (QOZ) are an excellent tax-free investment for those worried about capital gains. But what was not mentioned is that you can still save on your 2019 taxes with QOZs.
QOZs were created as a part of the 2017 Tax Cut and Jobs Act to encourage economic development in some of our country's most depressed areas by offering tax incentives to investors through a qualified opportunity fund (QOF).
A QOF is an investment vehicle that has elected to annually file Form 8996 with the IRS while investing 90% or more of their assets in a qualified opportunity zone. This annual designation allows the fund to gain preferential tax treatment for investments held for five years or more.
According to the Council of Economic Advisors’ August 2020 report, QOFs raised $75 billion in private capital through the end of 2019.
While some QOFs involve real estate projects, others have focused on operating businesses such as agricultural producers, alternative energy, life sciences, professional services and cannabis businesses.
IRS has extended deadline for investing in a QOF
Traditionally, if an investor wants to qualify for capital gains tax advantages with QOFs, then they must reinvest capital gains within 180 days of sale.
In response to the pandemic, the IRS extended the deadline to make an investment in a QOF and receive the QOF tax benefits. Investors have until the end of 2020 to place their capital gains in a qualified opportunity fund, if their 180-day deadline falls between April 1, 2020, and December 31, 2020.
So, if you plan on making an investment in a QOF before the end of year, please keep in mind that you will need to file an amended 2019 tax return to benefit.
Potential QOF Tax Benefits for Investors with Capital Gains
Investors who have eligible capital gains from the sale of stocks, real estate, businesses, or other investments earned before Jan. 1, 2027, can roll their qualified gains into a qualified opportunity fund.
To elect their eligible gain, investors must file Form 8949 as well as Form 8997 which provides them with the opportunity to benefit from the following tax incentives:
- Gain deferral — any tax on capital gains placed into a QOF, regardless of how long the investment is held can be deferred until the investment is realized or sold on Dec. 31, 2026, whichever is sooner.
- Deferred gain limited deduction — For QOF investments made during 2020, you can permanently exclude 10% of the gain from QOF income if the investment is held for five years or more. If the investment is held seven years or more, the cost basis for the original capital gain is reduced by 15%.
- Gain exclusion — If the QOF investment is held for 10 years or more, the investor benefits from the 15% cost basis reduction of the original capital gain, in addition to paying zero capital gain tax any appreciation in the value of the investment.
You should carefully consider investing in an QOF, if you have or will have significant capital gains that would benefit from tax deferral or capital gain reductions.
While the tax benefits are tremendous, you will need to be patient since investments require a minimum five-year investment.,,
Don’t let the tax strategy dictate your decision.
Choosing the right investment vehicle and market are key to a successful investment and should be evaluated in the context of your overall investment portfolio.
Please feel free to reach out to the professionals at RINA Wealth who can help you determine if an opportunity zone investment in 2020 is the right move for you.
This content is prepared solely to provide general information to our clients and community.
This content does not constitute accounting, tax, investment or legal advice, nor is it intended to convey a thorough treatment of the subject matter.