Facing Large Capital Gain? Time is Running Out to Avoid the Tax Consequences

Facing a Large capital gain? The year end is getting closer, and the closer it gets, the nearer you get to facing it head on. If you’d like to avoid a collision, there’s something you should know about. There’s a new tax break created under tax reform that will allow you to defer the tax on your capital gains through 2026.

Yes! No need to check Snopes—this one’s true. Created to promote investors to push money into low-income areas, the Opportunity Zone tax incentive has 3 distinct benefits for taxpayers who have capital gains they want to defer.

At first it feels good to get a nice price on the sale of a big ticket item such as a house. But guaranteed, the IRS will be biting at your heels for a piece of the action. Does that mean your nice hefty profits will go down the drain?

Not necessarily. There are ways to minimize or avoid forking over taxes on capital gains.

 

How Does Capital Gains Tax Work?

Many states assess capital gains taxes alongside the IRS. Capital gains taxes usually focus on the difference between what you pay for an asset and what you sell it for.

 

What Do Capital Gains Taxes Apply to?  

Along with real estate, capital gains taxes can apply to tangible assets like a car or boat. This can also apply to non-tangibles such as investments, like stocks or bonds.

If you’re facing capital gains tax payments, a new tax break may save the day. Part of the Tax Cuts and Jobs Act, it’s called the Opportunity Zone Tax Incentive.

Can it save you money? Yes. But it has other benefits as well. The program was designed to promote investment in low-income areas to help increase their value.

 

What is an Opportunity Zone?  

When a community is nominated by the state and certified by the Treasury Department as an Opportunity Zone, it qualifies as part of this special program. All 50 states have certified zones, and in all there are approximately 8,700 qualifying Opportunity Zones throughout the US, Washington DC, and US territories.

 

How and Why Would a Taxpayer Participate?

Taxpayers who are facing large capital gain after the sale or exchange of appreciated property and want to take advantage of the Opportunity Zone tax incentive program, have a limited amount of time to do so. In fact, they have 180 days from the date of the sale or exchange to invest into a Qualified Opportunity Zone Fund, a vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property.

 

What Are The Risks?

As with anything new, there are always potential risks. The IRS and Treasury Department are still gathering information on how the fund will work over time. Before you make any plans, note that investment in the new tax incentive may or may not be appropriate in your case. It’s best to consult with a tax professional to determine it it’s a fit for you. Contact one of our tax advisors for information.

 

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