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.
5/10/2021- Update: The next big Opportunity Zone deadline is June 30th
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.
Here’s how it works:
1. Tax deferral
The capital gains tax from the original sale may be deferred through December 31, 2026, or when the investment in the Opportunity Zone Fund is sold, whichever is earlier.
2. Step-up in basis
If an investment in a QOF is made before the end of 2021, and held for at least five years, investors are then eligible for a step-up in basis of 10%. This means investors only pay tax on 90% of deferred gains when filing their 2026 tax returns.
3. Elimination of capital gains tax
Additionally, if the investor holds the Opportunity Zone Fund investment for at least 10 years, any capital gain appreciation earned from the Opportunity Zone Fund investment is not taxed upon disposition. This is the most significant tax benefit provided by Opportunity Zones.
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.