Larger than expected 2019 tax bill? We may have an answer for you. Between Covid-19 extensions and Qualified Opportunity Zone investment deadlines, capital gains from as far back as January 2019 may still be eligible for tax-benefits. Too good to be true? Read on to find out.
Qualified Opportunity Zone Basics
If you’re unfamiliar with Qualified Opportunity Zones, I’ll provide a brief overview here. For those readers already well-versed on the legislation and capital gains tax-deferral incentives that can apply to QOZF investment, feel free to jump to the next section.
The Tax Cuts and Jobs Act of 2017 created some interesting capital gains tax incentives for the purpose of motivating private investment in low income areas. Based on 2010 census data and gubernatorial selection, 8700 census tracts were designated as “Qualified Opportunity Zones” (QOZ). Long-term investment of capital gains in these QOZ funds (QOZF) can provide the following tax benefits:
- Deferral – Taxes on capital gains that are reinvested in a QOZF will be deferred until December 31, 2026
- Reduction – Taxes on capital gains that are reinvested in a QOZF prior to 2021 will be reduced by 10% when they come due in December of 2026
- Tax-Free Growth – Capital gains realized from the sale of an investment in a QOZF are excluded from taxable income
Important to note that ANY capital gain is eligible (short term, long term) from the sale of ANY asset – real estate, business, securities, art, etc. For more detail on the specifics of Qualified Opportunity Zones, Qualified Opportunity Zone Funds, and the potential tax benefits, check out some of our earlier articles.
QOZ Investment Timelines
Investors familiar with QOZ rules may know that there is a 180-day window during which an individual must reinvest their gains to be eligible for the aforementioned tax benefits. Similar to the 1031 exchange, the clock starts on the day when an asset is sold and the capital gain is realized.
However, the rules become slightly more complicated for pass-through entities. This includes partners in a partnership, members of a limited liability company, shareholders of an S-Corporation, and beneficiaries of a trust, among others. In these scenarios, individuals may take advantage of additional time before investing in a QOZF, while still receiving the tax benefits. For these entities, the 180-day clock does not start ticking for reinvestment of 2019 gains until January 1, 2020.
Covid-19 and QOZ Investment Extension
In June, the IRS posted Notice 2020-39, extending those QOF investment deadlines. If a taxpayer’s 180th day to invest in a QOF fell on or after April 1, 2020, and before Dec. 31, 2020, the taxpayer now has until Dec. 31, 2020 to invest those gains into a QOZF.
It’s Not Too Late for 2019 Gains and 2019 Tax Deferral!
All this means that investors may still be able to take advantage of these tax benefits until December 31, 2020, even if they’ve already filed 2019 taxes.
- Larger than expected 2019 tax bill?
- Failed 1031 exchange in January 2019?
- Business sale in March 2019?
- Flipped a house in June 2019?
- Sold stocks in October 2019?