Qualified Opportunity Zone and Deferred Capital Gains

Congress created the Tax Cuts and Jobs Act (P.L. 115-97) in 2017 to give investors who made investments in economically challenged areas federal income tax benefits. Among other things, this act restricted state and local tax ("SALT") deductions at $10,000 and reduced corporate taxation, pass-through business taxation, and individual tax rates. It also made significant modifications to the federal tax structure. One of the tax benefits includes, the Qualified Opportunity Zone (QOZ) program, created by Congress, to provide investors with capital gains tax deferrals if they meet specific requirements until December 31, 2026, or until the investment is sold. As the conclusion of this program draws near, now is the time to work closely with your financial advisor, CPA and/or local tax attorney on building up your capital losses to help reduce impending tax impacts and prevent potential liquidity issues when this program ends.

Reinvesting capital gains in a Quality Opportunity Fund does not permanently defer them; instead, they retain their original tax nature and will be liable to the capital gains tax rates in effect during the corresponding year. Additionally, investors should consider budgeting for tax liability payments for any capital gains that do not receive income in specific inclusion years so that cash-flow is not impacted and tax payments are timely. You might consider harvesting capital losses to offset capital gains. Keep in mind, long-term losses are first applied to long-term gains and short-term losses to short-term gains, with the excess of either category applied to each type. This strategy cannot be used in managing retirement accounts (401(k) or IRA) because these are tax-deferred.

Legislation could extend the deferral period, but there is nothing on the horizon now. In the meantime, consult with your financial advisor, CPA and/or local tax attorney on what you can do to be proactive and prepared ahead of the closure of the QOZ program.

If you have any questions regarding your individual or businesses’ state and/or federal tax return(s)/tax liabilities or received a notice from the IRS, FTB, EDD, CDTFA or any other regulatory agency, please call or email Wilson Tax Law Group, APLC, to setup a consultation with our firm.

Wilson Tax Law Group, APLC is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group, APLC, is comprised of former IRS litigators & Special Agents, and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division, which at the time handled both civil tax lawsuits and criminal tax prosecutions on behalf of the United States of America.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Tel: (949) 397-2292 (Newport Beach Office) 

Tel: (714) 463-4430 (Yorba Linda Office)

Disclaimer: This blog post is for informational purposes only and does not constitute legal, tax or financial advice. Please consult with a qualified attorney, accountant or financial advisor for specific guidance related to your circumstances.