Individuals Who Wish to Invest in Certain Low-Income Areas Can Defer Capital Gains Until Year 2026
What Is a Qualified Opportunity Zone (QOZ)?
A QOZ is an economically-distressed community where new investments may be eligible for preferential tax treatment. Localities that qualify have been nominated by their states and have been certified by the Secretary of the U.S. Treasury (IRS). QOZs are designed to spur economic development and job creation in distressed communities.
Is There a Listing of QOZs?
What Preferential Tax Treatment?
If you own assets with capital gains and have sold those assets or wish to sell those assets in 2019, you can invest those proceeds and/or capital gains (or any portions thereof) in a QOZ within 180 days of the sale, but not later than December 31, 2019, and defer the tax on those invested monies. This tax savings also applies to prior years’ sales if not closed by the statute of limitations and if the required investment criteria are met. Monies invested after December 31, 2019 may lose certain basis adjustments and potentially any future tax benefits enacted.
The law provides for two additional upwards basis adjustments to further minimize capital gains, and if the QOZ is held for at least 10 years, the complete elimination of capital gains tax on the growth attributable to the gain invested.
The gain on the deferral of gains on the funds used in the initial investment isn’t perpetual. Those gains will become taxable at the end of 2026, or when the QOZ is sold, if sooner.
Qualified Opportunity Funds
If you think that this sounds like a good investment opportunity and a worthwhile cause, but do not wish to have direct ownership of property in a QOZ, there is another option. That option is a Qualified Opportunity Fund (QOF). QOFs are investment vehicles that are set up either as a partnership or corporation for investing in eligible property in a QOZ,
Our goal was to make our subscribers aware that such a tax savings opportunity exists. We are not investment advisors and do not make any investment recommendations. We are also not making any claims that this is a prudent investment. As with any investment, you need to exercise caution and perform your normal due diligence when selecting your investments.
We caution you not to solely focus on the tax savings. Remember, bad investments with good tax attributes remain bad investments.
If this is something that you would be interested in including as part of your investment portfolio and tax minimization plan, the next step would be to speak with your investment advisor who can explain how to make a qualified investment in an QOZ or QOF.
The tax rules regarding QOZs are complex and numerous. As stated above, our objective was to make our readers aware that such an investment vehicle exists and that the investment in a QOZ must be made by December 31, 2019.
After meeting with your financial advisor and should you seriously wish to consider investing in QOZs, you need to meet with your experienced tax professional and discuss the QOZ tax rules before making the initial investment.
Tax Planning Tip #1:
When you meet with your tax professional to discuss the tax rules regarding QOZs, be sure to request a discussion if better real estate investment options exist.
For example, discuss if like kind exchanges (LKEs) would be a better fit for you. LKEs provide indefinite deferral of the capital gains and at death, receive a step-up in basis to fair market value, virtually eliminating all capital gain taxes. On the other hand, LKEs do not receive basis upwards adjustments that QOZ investments receive.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.