Posts Tagged ‘tax-free capital gains’

Reduce Your Taxes to Zero!

Listening to an experienced accountant explain a tax situation sounds like easy work even when the words and numbers sound strange. It is rarely so easy connecting the dots, however.

The Tax Cuts and Jobs Act (TCJA) passed December 22, 2017 changed how you are taxed in ways we haven’t seen in over a generation. New opportunities to reduce your tax liability were opened, but the real advantages are hidden from plain view. It takes an experienced hand to ferret out the unexpected connections that can make or break your financial condition.

Today we are going to explore a thought experiment where we outline how the TCJA can super charge your tax savings. But first we have to tell a story.

A Chance Encounter

I spend my days researching the tax code for ways to help clients (that’s you, kind readers) reduce or even eliminate their tax liability. Some ideas are old and well-known. Others are somewhat unique in their application to the specifics of a client’s needs.

Our story starts with a longtime client and a real estate agent.

Wouldn't it be great to know all the tax reducing secrets of tax professionals? Now you can. Check out how accountants reduce their taxes to zero.

Wouldn’t it be great to know all the tax reducing secrets of tax professionals?

In my office there is a family limited partnership with several pieces of commercial property. One of their leases was coming up and I was unable to determine an accurate lease rate. Market rates are changing as real estate values climb.

Since it was my job to advise my client on an accurate lease rate I had my assistant call multiple sources around town to get an appraisal. My client was also interested in selling if the price was right.

After serious vetting we settled on a real estate agent with a history of success in the local commercial real estate market.

I was pleased the agent was wiling to provide a market analysis (a quasi appraisal) without fee. The agent provided the service and hoped to get the business if he did a good job.

My client also had a mini-mall with a vacancy. The current listing agent wasn’t able to sell or lease the unit in years. I convinced my client to get an assessment on this property as well.

The agent preparing the market analysis was fast, efficient and informative. The tenant of the first building we needed to update the lease with also wanted to buy. There was no need for the agent (or the fee) to sell or lease this property.




Good Luck

As luck would have it the tenant of the first building wanted to buy. My client was happy.

I felt it was fair to list the second property with the agent as a gesture of goodwill for his work assessing both properties. The agent did good work, followed up and was professional.

My client dragged his feet. The second building had one vacant unit with nobody working it now. I had to light a fire under my client.

After weeks (it was really a few months) of pleading my client finally relented and decided to let the agent offer the property for lease and sale.

The agent sent his assistant to pick up the paperwork the same day it was signed.

It Pays to Talk with People

It was getting to be 4:30 when the agent’s assistant showed up. I explained we sold the first building and didn’t need his services for that building. The assistant was good with that and understood our reasoning.

I then explained a unique tax strategy (a cost segregation study) that I shared with the buyer of said property. I mentioned to the assistant the buyer would save over $100,000 in taxes even though he was closing on the last business day of the year. These tax saving would be the result of a $300,000 first year deduction for owning the property a single day of the year!

People who know me understand how quiet I tend to be (dad, stop laughing). You can’t pry a word out of me.

Okay, I enjoy deep conversation that leads to massive results.

As I talked with the assistant I explained how the TCJA made it easier than ever to never pay income tax again. As we talked I kept building a bigger and bigger pyramid of tax savings strategies involving real estate. Many of these strategies would help the agent’s clients.

Needless to say, he took several of my cards. I reduced taxes for local businesses by several million dollars in less than one and a half hours. That short conversation opened a can of worms that will benefit this accountant’s communities for years to come.

And it was only possible because of the chance encounter with the agent. I knew all these things, but until that moment I hadn’t put the pieces together. Months of relentless research gave me the tools to excel at helping my clients in their tax matters as it pertained to the new tax laws.

And this is where you come in, kind readers.

The Gift that Keeps Giving

What I am about to share is merely a thought experiment. I will use large and round numbers because it is easier to understand that way. Many of these ideas will work for people with lower incomes. But in the end I will show you how you can have a million dollars in gains, pay no tax on said gain and end up with a $400,000 loss on your tax return you can use to offset other income.

Do I have your attention yet?

I hope so. This is new; this is novel, but it will work. The tax law is clear. What I am proposing can reduce your income tax to zero with extra deductions is case you have other income you need deductions against!

You will also seriously consider selling income properties you currently own to use this information. In fact, you may want to pass on like-kind exchanges (the old, and still usable, way to defer taxed on real estate) in the future. But I’m getting ahead of myself.




Step-by-Step Profits

The best way to understand my strategy is see it in action step-by-step. Because there are several ways to apply this strategy I will provide multiple solutions to the word problem.

Background:

Before we start I need share a few things that have changed in the tax code. Like-kind exchanges are a way to defer the gain on business or income property you sell by transferring the gain to a replacement property. While this tax strategy is still available for real estate, it is nixed in 2018 and after for business property. Capital gains from other investments are always taxable, until this year.

I sometimes get complaints that my tax strategies don’t apply to everyone. This is true. Not everyone can benefit from every strategy. The goal is to provide a framework that is understandable and modifiable for personal needs. While this works best for property owners with large gains, it can be tailored to lower incomes as well. It also assumes you have capital gains as that is our starting point. Wages and business income are not the driver of this strategy. If you want to reduce business income taxes you can read this. Wage earners should probably focus on retirement plan first as these provide significant deductions.

Starting Point:

We start with capital gains since real estate and the stock market have been climbing for a good decade now. The gains in these investments are huge and a real problem to diversify without incurring a large tax bill.

Real estate might seem easier since like-kind exchanges (sometimes known as 1031 exchanges) are still available. But a like-kind exchange requires a replacement property be identified within 45 days and closed within 180 days. And all your money stays in the replacement property to receive the tax benefit. (You can borrow against the equity of the replacement property after closing, but this costs you interest.)

It is easier than ever to reduce your income taxes to zero. Read how the wealthy and tax professionals pay no income taxes.

It is easier than ever to reduce your income taxes to zero.

With this in mind we need to deal with either large unrealized stock market gains or a piece of real estate with a large gain over basis (purchase price plus improvements minus depreciation).

For our example we will consider a stock investment (mutual fund, ETF, index fund, individual stock or other asset with an unrealized gain) with a $1 million unrealized gain and/or a piece of real estate with a large gain if sold.

The good news is that ALL capital gains are now super easy to avoid with a Qualified Opportunity Fund. I will not get into all the details of Opportunity Funds since I published recently on the topic in detail, available through the link.

For our thought experiment we can realize a capital gain from a real estate or investment sale and avoid reporting of the income currently. A million dollar gain can be deferred to 2026 and only 85% is taxed at that time with deflated dollars.

But Opportunity Funds are more than deferred taxes with a small tax reduction enhancer! All the gains within the Opportunity Fund (not the original gain, but gains on the capital gains invested in the Fund) are tax-free if held for 10 years or more.

Another benefit of Opportunity Funds over a like-kind exchange is how much needs to be reinvested. With the like-kind you need to buy a replacement property of equal or greater value to defer tax on all gains. Under the new rules only the GAIN needs to be reinvested in the Opportunity Fund within 180 days. The basis you can do whatever you want with.

Example: You have a duplex you bought for $200,000 and depreciated $50,000. You sell the property for $500,000. You can pocket your remaining basis ($150,000) and invest the taxable gain of $350,000 in an Opportunity Fund, avoiding any tax on the gain until 2026. (We will disregard depreciation recapture in this discussion so the examples don’t get muddy.)

Example: You bought $100,000 of Apple stock and now want to diversify without tax implication. Your Apple stock is now worth $1,000,000. You sell the stock, invest the capital gains in an Opportunity Fund and use the original $100,000 for whatever you want. Only 85% of the $900,000 capital gain will be taxed after 7 years and all the profit the $900,000 generates is tax-free after 10 years in the Opportunity Fund.

A Better Idea:

Selling your appreciated assets (investments or real estate) is only the starting point on your journey to tax-free freedom. Remember, you only deferred most of the gain. And if you have other income (business income, wages, dividends, interest or rental income) in need of deductions to avoid income taxes currently, you need another step.

Enter, real estate.

I assume you are not adverse to income property ownership in this stage of our game.

In our above examples we have large capital gains we deferred gains on and either $100,000 or $150,000 of basis we could do whatever we want with. I suggest buying a good piece of income property.

By good income property I mean a property that cash flows. You may need to buy something further from home base and utilize a property manager. This is probably a good thing regardless.

Without the necessity of replacing a property with an equal or greater value you have more choices. A half million dollar property doesn’t need to be replaced. Instead, with your basis from the sale, you can buy an income property that cash flows right out the gate and get more tax benefits.

Let’s jump to the cost segregation study again. You can read more with the link, including who I refer my clients to for a cost segregation study.

For a cost segregation study to work the property involved needs to have an original basis (generally the purchase price) of $300,000 without considering the value of the land.

The basis from the original sale in your pocket is perfect for a down payment on the property we are eyeing.

Example: Assume we buy a new income property (or properties) for $700,000. Under current tax rules a cost segregation study will turn approximately $300,000 of the purchase price of the building into a deduction the first year!

What this means: Think about this for a second. You sold a stock or rental property with a massive gain. You deferred/avoided tax on the complete capital gain by investing said gains in an Opportunity Fund. Then you decide to use the basis from the original investments as a down payment on an income property and conduct a cost segregation study. This equates to a $300,000 deduction on your tax return while avoiding tax on the capital gains! If you are a real estate professional or use grouping you can use this deduction against other income still being taxed.

But wait!!!

If you buy right now we will include this free pocket calculator. Keep it even if you return the product. It’s our way of saying. . .

Okay, I got carried away.

But I’m not done. there is even more!




Why You Want to Sell NOW!

Up till this point we played with big numbers with a focus on real estate. Deferring capital gains from any source is simple under current tax rules. A $30,000 mutual fund gain is easily deferred/avoided just as easily.

But what about landlords. If you own real estate now you might want to consider selling!

Remember our thought experiment above where we defer gains and apply cost segregation studies on new properties? If you already own real estate with gains you have an additional tax planning tip.

Cost segregation studies are possible on properties you held for years. The tax benefits are still tremendous.

However, unleashing gains on existing properties is a powerful way to spike cash flow!

More isn’t always better so I always recommend property managers for the day-today tasks of property management. Your job is to buy the right properties at the right price. Rinse and repeat. The manager/s should handle the rest.

Example: In this example we will start with three income properties you owned for 10 years. We’ll assume you have a combined basis of $500,000 on these properties with a market value of $1 million. A cost segregation study on each of these properties is inadvisable (each property is less than $300,000).

They say taxes are for the poor. No more. Keep your hard earned money where it belongs: your pocket. The rich have many ways to avoid taxes. Here are three you can use.

They say taxes are for the poor. No more. Keep your hard earned money where it belongs: your pocket.

If you keep the properties your cash flow grows only as fast as market rates for the three properties. You pay tax on all the profits after expenses.

Unless you sell!

That’s right. Sell the three properties. Invest the capital gains in a Qualified Opportunity Fund and use the $500,000 basis as the down payment for a larger value property where a cost segregation study will work well.

Assume we find a multi-unit complex for $1,000,000. The half million capital gain is in Qualified Opportunity Funds avoiding tax while the other half million is available for any use you want. Whether you use all the excess money from the previous sale or borrow more funds to purchase the complex, you will realize around a $400,000 deduction under current tax rules due to the cost segregation study. This massive deduction is available to reduce your other income property profits or income from other sources in many cases.

If the three income properties were throwing off $4,000 a month, the complex should be doing the same or more and the cost segregation study will generate a deduction to eliminate the tax on these profits. (Your taxes would be low or zero in this example if you had no other reportable income so other factors must be considered before you proceed.)

Example: Here is another example worth considering. Let’s say you’ve owned a property for decades and depreciated the property to the land only. The property is throwing off oodles of cash flow, but it is all taxed because there are few deductions (mortgage is paid off,too) and no remaining depreciation.

Capital gains from the sale would go to a Qualified Opportunity Fund to defer/avoid taxes once again. Buying another property to replace the lost cash flow opens the opportunity for a cost segregation study.

I didn’t use numbers in the last example for a reason. The idea is to provide a framework you can tweak to your personal needs. The idea is to keep cash flow pouring in while reducing or eliminating income taxes from any and all sources. The only way to do that is with a new piece of property.

Coda

Taxes are complicated and getting worse. Today’s thought experiment is not meant as a definitive guide to eliminate taxes. Rather, my goal was to help you think differently about taxes and strategy.

The tax code may seem straight forward, but the real benefits come from putting the pieces together. I asked my Facebook followers if they would like a program to reduce their taxes to zero. The response was overwhelming. I asked the same group what taxes they wished they could avoid taxes on this year. Capital gains came up often.

We didn’t cover every type of income or every income level. The idea is to plant a seed in your brain so it can grow.

The TCJA is a massive piece of legislation. The advantages are hard to grasp in the basics and putting the pieces of the jigsaw puzzle together in a way that benefits you is even more difficult.

What I provided above should have been a pleasant exercise. You can see how the new puzzle pieces have increased the opportunities to reduce your tax liabilities.

It might be a good idea to read this a few times and even save it. Share it with friends (enemies don’t deserve this level of tax savings). You might even want to use a highlighter on key points:

  • Sell with no current capital gains tax using Qualified Opportunity Funds and
  • Buy quality real estate where a cost segregation study works well to eliminate all other income taxes.

Below I include the regular list of additional Wealth Building Resources I attach at the end of posts over the last half year or so. You can find cost segregation links easily there from all current posts.

Finally, don’t be afraid to think outside the box when it comes to taxes. Now is the easiest time to reduce your tax liability in over 100 years. Use this opportunity to fuel your net worth.

These good times are unlikely to last forever.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 



Opportunity Funds: Deferred and Tax-Free Gains

An Opportunity Fund can defer or eliminate capital gains taxes. Keep more of your money. #wealthyaccountant #capitalgains #taxes #investments #opportunityfunds
Jump for joy! You get to keep more of your money. Reduce or eliminate capital gains taxes with an Opportunity Fund. #wealthyaccountant #taxes #capitalgains #profits #opportunityfunds

Jump for joy! You get to keep more of your money.

The Tax Cuts and Jobs Act of 2017 brought several new opportunities to reduce your tax burden. A few previous options have been reduced or eliminated. First the bad news.

Like-kind exchanges are now limited to real estate. Capital gains in real estate can be deferred into a replacement property if complicated tax rules are followed. The same cannot be said for business property any more.

The good news comes to us in what is known as §1400Z-2 and §1016(a)(38) as added or modified by the Act. This might sound like a mouthful, but once you understand the implications your mouth is sure to start salivating. In a language normal people understand this means ALL capital gains can be deferred with some gains even tax-free at some point. It also means future gains (for a limited time only as we’ll discuss shortly) can be completely tax-free!

Your favorite accountant has received multiple requests to cover these new Opportunity Funds and Zones in detail due to the conflicting and limited information published elsewhere. In this post we will dig deep into the subject, unveiling the nuances you can use to take a serious bite from your tax liability.

We will also use multiple examples to illustrate available options in utilizing Opportunity Funds.




The Basics

Opportunity Funds were created by the Act to encourage investment in economically disadvantaged areas of the country. To encourage investment in these areas Congress provided for zones that would have special tax advantages.

There are two major advantages when investing in Qualified Opportunity Funds:

  1. Tax deferral: Taxes on capital gains invested in a Qualified Opportunity Funds are deferred while the funds are invested in the Fund.
  2. Partial tax-free capital gains: Some of the capital gains deferred become tax-free in some instances (discussed later).
  3. Tax-free growth: Capital gains on investments in a Qualified Opportunity Fund become tax-free if held for 10 or more years.

Point 3 above comes with caveats we’ll discuss below. Deferred gains of the investment used to fund the Qualified Opportunity Fund need to be recognized on December 31, 2026 (or when the investment is sold, whichever comes first) even while the gains from the Fund investment continue deferring to the 10 year anniversary where they become effectively tax-free. Examples below should clarify.

An Opportunity Fund can defer or eliminate capital gains taxes. Keep more of your money. #wealthyaccountant #capitalgains #taxes #investments #opportunityfunds

An Opportunity Fund can defer or eliminate capital gains taxes. Keep more of your money.

You are allowed one temporary election to defer gain. In other words, you can use a portion or all of a gain to invest in a Qualified Opportunity Fund, deferring the gain, and the remainder is reported as gain with applicable taxes paid in the year realized.

You self-elect. Revenue may produce a new form to report this election which is attached to your tax return when you file. You have 180 days to invest the gains into a Qualified Opportunity Fund. The act of investing these gains into a Qualified Opportunity Fund within the 180 day window is your effective election.  You will probably have a simple election button to click on your tax software to report the deferral instead of an additional form to fill out. Be sure to track your Fund investments manually if you change accountants or switch tax software.

The 180 day window to invest includes weekends and holidays. The Act is unclear on this issue, but it seems to indicate 180 calendar days rather than 180 business days, even if the 180th day falls on a holiday or weekend. There is no extension of the 180 window to the next business day.

Only gains are involved. Like-kind exchanges use a complicated formula to determine the amount required to be invested in the replacement property. With Qualified Opportunity Funds only the gains need to invested.

Example: You buy a piece of land for $100,000 and sell it in 2018 for $250,000. Only $150,000 of the sale is required to be invested in a Qualified Opportunity Fund to defer taxation on the gain.

 

Issues

Before we dig down into the details you should note there are several issues with the Tax Cuts and Jobs Act. In at least one section of the Code there is a reference to another section which makes no sense. We are left to assume what Congress meant if a reconciliation bill doesn’t correct the errors. The IRS will eventually write regulations on the ambiguous issues with the Tax Court determining the actual nature of the issues in question.

Another issues involves the IRS. Revenue promised clarification by late summer. As of this writing the IRS has not provided the form for self-certifying for those wishing to start their own Fund or additional guidance on how to handle many of these issues. The tax profession is left to determine the procedures with the risk regulations and/or the Tax Court may later determine differently.

I will note where the ambiguous issues reside as we review examples below. Taxes by nature have similar issues. Using Qualified Opportunity Funds to defer capital gains is something to consider. Just understand some details may change in the near future. Of course, the Tax Code can be modified at any time so stay tuned for updates.




Tax Benefits

The tax benefits from investing in a Qualified Opportunity Fund are significant with a bonus benefit.

  • Any capital gains invested in a Qualified Opportunity Fund within 180 days of a realized capital gain is deferred until the investment is divested or December 31, 2026, whichever comes first. There is no limit on how much can be deferred. Caution!  While the 10 year rule is still in effect, the tax deferral benefit ends December 31, 2026 and the original capital gain will be reported as income minus the basis adjustment discussed next. You are still required to hold the Qualified Opportunity Fund investment 10 years to receive tax-free status on the Opportunity Fund investment.
  • Investments held in a Qualified Opportunity Fund for 5 years receives a 10% basis adjustment and a 15% basis adjustment for capital gains deferred into a Qualified Opportunity Fund for 7 years. Example: The wording of this tax benefit can be confusing. If you have an income property held for decades with the entire basis (except land) depreciated, the basis is rather low or even zero. However, for this adjustment we use the basis of the deferred capital gain. If $1 million of capital gain is deferred, $100,000 is added to basis after 5 years and $150,000 after 7 years, thereby reducing the deferred capital gain by 10 or 15 percent.
  • There is a 10 year rule when investing in a Qualified Opportunity Fund to receive tax-free treatment of the capital gains from the Fund. Do not confuse this with the original deferred capital gains. Example: Using the above example, assume an $800,000 capital gain while invested in the Qualified Opportunity Fund over a 10 year period. The original capital gain is reduced by the 15% basis adjustment and reported (if held 7 or more years) when divested or on the 2026 tax return for calendar year taxpayers. The additional $800,000 capital gain from the 10 years invested in the Fund become tax-free.
  • While the beauty of investing in Qualified Opportunity Funds involves the deferral of capital gains, there is nothing precluding someone from investing non-capital gains funds for 10 years to receive tax-free capital gains from the Fund. (Jake Drum, a reader, suggested the following edit: You will be able to contribute non-capital gain dollars to the Fund, but only the capital gains contributed will receive tax benefits. See his comment below with my response.)

 

Observations and Examples

The concept is simple in theory, but nothing in the Tax Cuts and Jobs Act is as simple as it seems. (A true statement of the entire tax code.) The details are important when such a long-term investment is required to receive tax benefits. Details of your personal situation can color the benefits of the program.

  • Only one election can be made per sale or exchange. However, a temporary election can be made and a permanent election made later. The temporary election is the one made from gains invested in a Qualified Opportunity Fund where gains are temporarily deferred and the permanent election is made when you the sell an investment in a Qualified Opportunity Fund.
  • Revenue will need to clarify the temporary and permanent election issues. It seems the one election limit prevents reinvestment of gains from the sale of a Qualified Opportunity Fund into another Fund.
  • It is possible the gains from an installment sale would be limited to one temporary election only. This would limit the value of an installment agreement if deferral is desired.
  • Section 1400Z-2(a)(1)(A) of the Code appears to be in error as it references the wrong section of the Code. There is a similar error in §1400Z-2(b)(1)
  • If your investment in the Qualified Opportunity Fund declines the FMV is used to compute the gain after the deferral period ends, allowing for a reduction in the reporting of the deferred gain on your tax return. This effectively reduces your original capital gain.

Example: You defer $100,000 of gain by investing the gain in a Qualified Opportunity Fund. The investment declines by $10,000 at the time of sale. The reported original gain is now $90,000 ($100,000 deferred gain minus the $10,000 loss in the Fund).

  • While nothing precludes an investment in a Qualified Opportunity Fund from non-gain sources, the basis of your investment in the Fund is zero with some exceptions. If the Fund is sold prior to the 10 year period all the sale price is considered gain. If you are considering an investment of non-gain funds you must be certain you will remain invested the entire 10 year period or your original investment will be taxed as well as the Fund investment profit.
  • The only adjustments to basis is a 10% addition to basis after holding the Fund investment for 5 years and 15% after 7 years.

Example: A deferred gain (or non-deferred gain if you choose to do so) is given basis at the 5 and 7 year mark. If you invest $100,000 in a Qualified Opportunity Fund the basis is zero during the first 5 years, less a day. At 5 years the basis would be adjusted to $10,000, and $15,000 at 7 years. It also appears this only applies to deferred gains when the temporary deferral period ends December 31, 2026 and recognition of gain is required. An actual sale of your Fund investment would cause a circular computation negating the basis gains.

  • If you invest gains and non-gains into a Qualified Opportunity Fund it is treated as two separate investments: deferred gains as one and other than gains invested as the other.

Example: You sell an asset with a $100,000 gain. You elect to defer $80,000 immediately by investing in a Qualified Opportunity Fund. Later you decide to invest the remaining $20,000 of the gain. Unfortunately, the one-election limit doesn’t allow deferral of the $20,000 portion on the Fund investment. The $20,000 does not qualify for deferral and must be included in income the year the gain was realized.

Example: Let’s go the other direction. You once again have a $100,000 gain. You instead invest $125,000 into a Fund. Only the $100,000 gain is deferred and considered one investment (the temporary election) and the additional $25,000 as another investment. This is true even if the investment was made in one combined sum.

  • Once again, the temporary deferral period will be different from the permanent exclusion period. Deferred gains (if held to December 31, 2026) are reported on your 2026 tax return while the exclusion period of the Fund gain will continue for 10 years which means most deferred gain will be reported as income prior to the exclusion gains becoming effective due to the 10 year investment requirement.

 

Risks

Qualified Opportunity Funds are new and must invest at least 90% of Fund assets in Qualified Zone property. Qualified Zone property is located in low-income areas of the U.S. These untested investments could suffer significant losses in an economic downturn. There is also the risk new Funds are operated by unseasoned professionals.

Serious levels of due diligence is required before and investment is made in any Qualified Opportunity Fund.




Investment Choices

Several Qualified Opportunity Funds have opened to date. Still, the choices available are lower than in many other asset classes. You can use a search engine to find Funds to invest in. The Fundrise Opportunity Fund is one such example of a Qualified Opportunity Fund.

Fundrise is not an affiliate nor affiliated with this blog, nor have I reviewed their portfolio. I make no claims as to the suitability of investing in Fundrise. It is advised you begin your search for a suitable Qualified Opportunity Fund as soon as possible. The 180 day investment window provides adequate time for in-depth review of Fund choices if you start early.

 

Starting Your Own Qualified Opportunity Fund

You can also start your own Fund to manage your deferred gains.

An Opportunity Fund could be a better choice over a like-kind exchange when it comes to how much money you keep after taxes. Learn the details here to keep more of your money. #wealthyaccountant #taxes #capitalgains #investments #oppoertunityfunds

An Opportunity Fund could be a better choice over a like-kind exchange when it comes to how much money you keep after taxes.

A Qualified Opportunity Fund must be a corporation or a partnership. (An LLC electing to be treated as such for tax purposes should pose no problem as it isn’t specified or excluded in the Code. An S corporation is not an option; only a regular corporation or partnership can be a Fund.)

 

Observation: A Fund can’t be organized for the purpose of investing in other Qualified Opportunity Funds. The IRS may provide future regs modifying this situation. As of this writing a Fund should not invest in another Fund.

 

Here is the best part of starting your own Qualified Opportunity Fund: you self-certify. Do you like that? The IRS will have a form by late summer (not yet available as of this writing) which you fill out and attach to your corporate or partnership return. It’s as simple as that.

 

Observation: Here is a map of the U.S. with all the Qualified Opportunity Zones listed. Starting your own Fund gives you some control over how your money is invested. However, you can only make investments in Qualified Opportunity Zones.  You will need to zoom in to see the actual Zones.

 

What can your Fund invest in? Investments must be tangible property used in trade or business of the taxpayer and meet these three requirements:

  1. The property was acquired after December 31, 2017 in a Qualified Opportunity Zone.
  2. Use begins with the Fund or the Fund substantially improves the property. Substantial improvements are defined as additions to basis for the property after acquisition during a 30-month period where the basis is increased by an amount greater than basis at the beginning of the 30-month period. Example: Property has a $100,000 basis at the beginning of the 30-month period. Substantial improvements would require additions to basis of greater than $100,000 by the end of the 30-month period.
  3. Substantially all the use of the property must be within a Qualified Opportunity Zone.

Intangible property is not a qualified investment for a Qualified Opportunity Fund; only tangible property counts.

If you are running your own Fund you cannot make an acquisition for your Fund from a related party. There also appears to be errors in the Code in regards to related party purchases by a Fund. These errors will not negate the related party prohibition.

Some investments within a Zone are also prohibited: golf courses, massage parlors, hot tub facilities, country clubs, suntan facilities, racetracks and other gambling business and liquor stores.

One final consideration if you plan on starting your own Qualified Opportunity Fund. There are penalties if the Fund has less than 90% of assets  invested in Qualified Opportunity Zones.

 

Final Comments

The IRS has answered some questions on the topic at hand. Keep in mind the IRS is not the final arbiter in these matters: the Tax Court is. You cannot use advise from the IRS as substantial authority. That is only gained from an enrolled agent, CPA, attorney, the Tax Code, Tax Court rulings and other qualified sources.

Turn capital gains taxes into a powerful tax-free income generating income machine. The ultimate in passive income: the Opportunity Fund! Stop paying taxes on gains today. Read more here. #wealthyaccountant #passiveincome #taxes #taxfree #tax #taxes #investments

Turn capital gains taxes into a powerful tax-free income generating income machine.

Deferring capital gains is easier than ever. While the like-kind exchange has been limited to real estate now, investing in a Qualified Opportunity Fund might be the best remaining option.

There is an argument where the like-kind exchange even for real estate might not always be the best choice. Investing gains in a Fund has more flexibility and liquidity in many cases. Coupled with the increases in basis and potential (if held for 10 years) of excluding all the gains from the Fund investment, a like-kind exchange is no longer an automatic choice for deferring gains.

This is a difficult topic with an easy to understand framework (invest capital gains in a Qualified Opportunity Fund for 10 years and defer 85-90% of the temporary gains until 2026 and the the remainder of the gains are excluded from income permanently.)

The details is where the tire meets the pavement. It would be a good idea to either print out this page or bookmark it for future reference. Unless your gains are a simple transaction the details will motivate your decision process.

 

I know this got technical. Regular readers normally expect a bit lighter reading. However, this has to be published. Too many people need the information as the traditional press is glossing over the subject and many tax professionals are still struggling with the implications of all the nuances of the Tax Cuts and Jobs Act. I have one more in-depth tax issue to address before we lighten the reading material for a family audience. Until then, take car, kind readers. May this lighten your tax burden at least a bit.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!