Can I Defer and Lower My Taxes with a Qualified Opportunity Zone Fund?

Recently, we learned that a Lebron James rookie card sold for $1,600,000! Assuming the owner paid $1 for the card, that’s a big windfall! But that could also be a large tax liability. Well, maybe not. Depending on the decisions of the owner, they might have some control over the tax liability.

Under the Qualified Opportunity Zone Program, created by the Tax Cuts and Jobs Act of 2017, he/she could have substantial tax benefits. And now, as a result of an extension, he has until the end of the year to invest in a Qualified Opportunity Zone Fund (QOF) and realize those tax benefits.

Here’s a quick overview on the Qualified Opportunity Zone Program (QOF):

Investors normally have 180 days from the date they sell an asset, to invest the gains into a QOF to receive the tax benefits. For K-1 gains (partnerships) and section 1231 gains (investment real estate) investors normally have 180 days after year-end (June 27th, 2020).

Those tax benefits are three-fold:

  • D – Defer cap gains on the asset sold until 12/31/26
  • R – When taxes are finally paid in 2027, they are paid on a Reduced amount
  • E – If the QOF is held for 10 years, all cap gains from the appreciation of the fund are Eliminated

What’s new:

  • Due to the COVID-19 Pandemic, IRS Notice 20-39 extends the deadline to December 31st, 2020.
  • This means any short or long-term gains realized after 10/4/19are eligible to invest in a QOF until 12/31/20.
  • K-1 and section 1231 gains realized after 1/1/19 are eligible to invest in a QOF until 12/31/20.

Hypothetical example:

An investor sold a rental property that closed for on January 2nd, 2019. The property sold for $2 million with a cost basis of $500k. The investor was not able to execute a 1031 exchange for various reasons (financing, competitive market, lack of acceptable inventory). Rather than pay capital gains tax on the $1.5 million capital gain, the investor has until December 31st of this year to invest the proceeds in a QOF. Only the gain is invested in a QOF, therefore the $500k of basis can be pulled out with no tax liability.

This is complicated. Let’s talk. Your next step:

Book a consultation and find out if a Qualified Opportunity Zone fund is right for you and your financial plan. I’m happy to speak to your CPA or tax professional to make sure they understand it completely and we’re all helping towards your financial goals.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

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