December 31 marks the last day to receive the full 15 percent permanent reduction of the deferred capital gains tax and the first day 2019 K-1 and Section 1231 gains are eligible to invest in a Qualified Opportunity Fund.
Defer then hold to term maximizes return
Making both moves maximizes the benefits to participants who invest sooner and hold longer. Models show that investing deferred capital gains taxes by Dec. 31 and holding for 10 years generates approximately 300-400 basis points higher after-tax returns and twice the profits when compared to a standard taxable portfolio.
But because of the program’s tiered deferral of capital gains tax, failure to invest by Dec. 31 leaves money on the table. Here’s how it works:
- An investor has 10 percent of the deferred gain permanently forgiven if held for five years prior to Dec. 31, 2026.
- Hold for at least seven years and another 5 percent, or 15 percent total, is permanently deferred.
- Make the investment New Year’s Day 2020 and you are not eligible for the full 15 years.
- Hold for at least 10 years and eliminate all capital gains.
Act before end of the year for most benefit
The extra 5 percent tax savings is significant depending on the number of years you hold the investment – $12,000 to $20,000 for $1 million of capital gains invested on or before Dec. 31, 2019.
The date becomes even more important since 2019 K-1 and Section 1231 capital gains now also are eligible for the 15 percent reduction.
Why all of this is important
Three key year-end take-aways make Opportunity Zone investments a smart move:
- Year-end deadline eliminates procrastination. Roll capital gains before Dec. 31 for 5 percent boost in deferment and possible elimination.
- Put 2019 K-1 and Section 1231 proceeds to work in tax-advantaged environment.
- Maximize capital gains reduction or elimination depending on duration held.
Take advantage of the year-end Opportunity Zone rules and toast to an even brighter 2020.