If you carry out an asset sale, you could face a significant capital gains tax bill if you’re unprepared. I work regularly with clients to show ways to manage the sale of stocks, real estate, and business. One option to consider is the Opportunity Zone, as it can have advantages such as tax deferral.
Opportunity Zones came as a result of the Tax Cuts and Jobs Act of 2017. They were designed to encourage investment in underserved areas across the U.S. For high net worth individuals, they can provide a way to defer, reduce, and eliminate capital gains taxes. If you get involved, you’ll be putting your money to work as you’ll benefit from long-term growth potential.
What Is an Opportunity Zone?
An Opportunity Zone is a designated underdeveloped community that is positioned to grow from investments. If you make an investment into the area, your funds could be eligible for certain tax benefits. To participate, you reinvest capital gains into a Qualified Opportunity Fund (QOF). This is a vehicle set up to invest in properties or businesses within these zones.
How the Tax Deferral Works
You’ll want to understand how your tax bill could be impacted through Opportunity Zone investments. Here are some key benefits to keep in mind as you consider this option:
- Tax deferral: You can defer taxes on any prior capital gains invested in a QOF until December 31, 2026 or the day you sell your QOF investment, whichever comes first.
- Tax reduction: If you hold the QOF investment for at least five years before the deferral deadline, your original gain is reduced by 10%.
- Tax elimination: If you hold your QOF investment for 10 years or longer, you won’t pay any capital gains tax on its appreciation.
If you’ve just sold an asset and have a large capital gain, you are given 180 days from the date of the sale to roll the gain into a QOF. By acting within that window, you could take advantage of these tax opportunities.
Take Action Early
When it comes to making decisions about your investment in a QOF, you’ll want to plan ahead. The sooner you act, the more time your money has to grow tax-free. You’ll also be able to work within the given windows, such as the 180 days to be eligible. You’ll want to work with your tax, financial, and legal advisors to evaluate potential QOFs and structure your investment correctly.
With the right strategy, Opportunity Zone tax deferral can help you keep more of your gains. You’ll also have the chance to help areas with the potential to grow economically. If your tax professional hasn’t brought up these options, you might want to find a professional who understands these tax-advantaged assets, who can—and will—collaborate with you and your tax professionals to get a best-in-class outcome.