Earlier this year the IRS extended the deadline to make an investment in a qualified opportunity zone fund — which also means you have more time to receive the potential tax benefits.
Update: 1/28/2021
This page has been updated to reflect the extension of the opportunity to invest until March 31, 2020.
Key insights
- Consider investment in a qualified opportunity zone fund (QOF) to potentially reduce your 2019 tax liability.
- Defer gain recognition on the amount of capital gain invested until your 2026 tax year unless the QOF investment is sold earlier.
- Invest in a QOF during 2020 or 2021 to permanently exclude 10% of the gain from income (if you don’t sell the investment before the 2026 tax year).
- Exclude any appreciation in the value of the investment from income if the QOF investment is held at least 10 years.
Need guidance on QOF tax benefits?
With the 2019 tax filing season finally behind us, you can breathe a sigh of relief and start thinking about your 2020 taxes. However, if you paid tax on capital gains generated during 2019, there may be an opportunity to help reduce your 2019 tax liability.
In response to COVID-19, earlier this year the Internal Revenue Service (IRS) extended the deadline to make an investment in a qualified opportunity zone fund (QOF) and receive the QOF tax benefits. If your 180-day investment period would have ended on or after April 1, 2020, you now have until December 31, 2020, to make a QOF investment.
As this deadline extends past the 2019 individual tax filing deadline, you would need to amend your 2019 tax return to take advantage of this opportunity if you make an investment in a QOF before year-end.
The potential QOF tax benefits include:
- Initial gain deferral — Gain recognition on the amount of capital gain invested is deferred until your 2026 tax year unless the QOF investment is sold earlier.
- Partial reduction in deferred gain — For QOF investments made during 2020, you can permanently exclude 10% of the gain from income assuming no sale of the investment before the 2026 tax year.
- QOF gain exclusion — If you hold the QOF investment for at least 10 years, any appreciation in the value of the investment may be permanently excluded from income.
Taxpayers have raised concerns about the gain deferral in the event of a change in tax policy. However, for a QOF project that performs as expected, an increase in the capital gains tax rates only accentuates the positive benefits of the QOF gain exclusion and the initial gain deferral period. These benefits are generally expected to outweigh the negative impact of the higher tax due in 2026.
As always, evaluate a QOF investment in the context of your overall asset allocation and don’t let the tax strategy dictate your decision. Choose the right QOF carefully — the underlying QOF investment performance is of utmost importance.
How we can help
CLA’s tax professionals and wealth advisors can help you evaluate whether or not an opportunity zone investment in 2020 could result in a benefit on your 2019 tax return. The opportunity to invest has been extended through March 31, 2021. To learn more, reach out to our team or check out our recent video for additional details.
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