Do you have income from capital gains in 2020 or passthrough capital gains from 2019 that you would like to re-invest? If so, you still have time to reduce your tax bill. The Tax Cuts and Jobs Act, signed on December 22, 2017, created an opportunity to defer tax on capital gains by reinvesting the gains into a qualified opportunity zone fund (QOF). A QOF is an investment vehicle that is organized as a partnership or a corporation to operate a business in designated low-income areas referred to as “opportunity zones.” The deadline to make an investment in these funds and defer gains has recently been extended.
The original deadline to re-invest the capital gains realized from the sale or exchange of property to an unrelated party is within 180 days of the sale or exchange. If the taxpayer reinvested any capital gain into a QOF within 180 days after the sale, tax on the gain is not due until December 31, 2026 or, if earlier, the date the taxpayer sells their investment in the fund. Additionally, if the taxpayer does not sell their investment for 10 years, any appreciation in the value of the investment is not taxed at all.
The IRS recently issued Notice 2021-10 which extends the 180-day investment deadline to invest capital gains into QOFs. It had been previously extended under two prior notices. Under Notice 2021-10, for any 180-day period that ends on or after April 1, 2020 and before March 31, 2021, the deadline is automatically extended to March 31, 2021. This means that gains recognized from October 4, 2019 through October 2, 2020 all have an extended investment deadline of March 31, 2021.
For taxpayers with a gain reported on a Schedule K-1, the new March 31 deadline applies to any gain recognized on or after January 1, 2019. For example, if you received a capital gain from sale of an asset held inside a passthrough entity such as a partnership or S Corporation during calendar year 2019, the last date those gains could be reinvested would have been December 31, 2020 (under the most recent extension issued in June). However, based on notice 2021-10, you now have until March 31, 2021 to re-invest those gains.
Notice 2021-10 also extends the time that QOF businesses must comply with qualification requirements. The notice extends the 30-month substantial improvement period, 90% investment standard for QOFs, working capital safe harbor for QOZ businesses and 12-month reinvestment period for QOFs.
For additional information, please contact Kira Wheat, or any of your trusted advisors at HHM, today by calling 423.756.7771.