Do your investments have unrealized gains which you are considering “harvesting”? Or are you currently contemplating the sale of appreciated real estate or business interests?

If so, the 2017 Tax Act offers a considerable tax break for investors who reinvest capital gains into new Qualified Opportunity Funds (“QOF”). These rules offer three potential tax-planning benefits: deferred capital gain, reduced capital gain, and exclusion of appreciation of the new investment from income.

First, you can defer paying the tax on the realized gain until the earlier of the time the QOF is sold or December 31, 2026. Second, the amount of the deferred capital gain you then recognize is reduced by 10% if you hold the QOF for five years or by 15% if you hold the QOF for seven years (by the end of 2026). Third – and the potentially most powerful benefit – if you remain invested in the QOF for at least 10 years, any gain you generate on the QOF would be tax-free.

To qualify for this incredible planning opportunity, there are three general requirements. First, you must realize a capital gain from the sale or exchange of a capital asset with an unrelated party after December 31, 2017, and before December 31, 2026. Unlike 1031 “like-kind” exchanges, there is no requirement that the capital gain arise from like property. Second, you must reinvest the gain in a QOF within 180 days of the transaction that triggered the gain. Third, the QOF must invest at least 90% of its assets in Qualified Opportunity Zone property, which includes stock in certain corporations, an interest in certain partnerships or LLCs, and tangible property used in a trade or business of a QOF that substantially improves the property.

To illustrate: if you have a $50,000 gain from selling an asset and reinvest the gain in a QOF, after seven years the taxable amount of the gain would be $42,500 ($50,000 less the 15% reduction of $7,500). If the initial $50,000 grows to $100,000 over 10 years of being invested in the QOF, you could take that $50,000 gain ($100,000 less the initial investment of $50,000) entirely tax-free.

If you recently sold an asset and realized a capital gain, or if you are considering selling assets soon, consider whether this tax planning opportunity is right for you and then work with a tax lawyer to take advantage of it.

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