As part of tax reform put into place a couple of years ago, individuals are able to defer both short- and long-term capital gains into what are referred to as Qualified Opportunity Zone Funds (QOFs). What is nice about this is that only the actual amount of gain needs to be invested into a QOF to avoid taxes on the gain for the sale year. The gains invested in a QOF are deferred until you cash out of the QOF investment or December 31, 2026, whichever occurs first.
This includes the gain from the sale of all capital assets, such as stocks or bonds, property, rentals, land, and even partnership interests.
Example: You sell 1,000 shares of stock that cost you $20 a share (a total cost of $20,000). You were very fortunate, and the stock had appreciated to $100 a share when you sold them, for a total sales price of $100,000 and a capital gain of $80,000. If you invest the $80,000 gain in a QOF within the required 180 days, the gain on the sale and the tax on the gain are postponed.
Example: Another example would be if you had inherited vacant land several years ago, and the fair market value of the land at the time you inherited it was $50,000. This year, a grocery chain wants to build a grocery store on the land and purchases it from you for $300,000. As a result of the sale, you have a gain of $250,000 ($300,000 – $50,000). If you invest that $250,000 gain in a QOF within the required 180-day period, you can defer the gain and the tax on the sale.
If your taxable income is exceptionally low this year, or even if you expect not to be required to file a tax return this year, a number of tax opportunities may be available to you. But time is running short, since these opportunities will require action on your part before year’s end.
However, before we consider actual strategies, let’s look at key elements that govern tax rates and taxable income.