If you invested in a QOZ after 2017, you need to be proactive this year with a phantom capital gains tax.
One of the benefits of QOZ investing was the deferral of capital gains until the end of 2026. That gave investors as many as seven years of tax deferral on capital gain. But that bill will come due at the end of this year.
For investors and their advisors, the key issue is planning ahead. A deferred gain may create a tax bill even if there is no corresponding liquidity on hand. That is why this year matters.
Here are four basic strategies to address the capital gain.
1. Fund a New QOZ
Congress extended the QOZ program last year, and a new batch of QOZs will be available for investment later this year.
If you reinvest into a new QOZ, you receive five more years of tax deferral.
2. Fund a Long/Short Fund
Long/short funds have become quite popular in the last few years.
These funds can provide up front capital loss allocations in the range of 30 to 40 percent of the amount invested into the fund, but ultimately the deferral turns around in the ensuing years.
3. Fund Other Deferral Strategies
Another option is to fund other deferral strategies.
For instance, making some equipment-heavy investments may create 100 percent bonus depreciation.
4. Plan for Liquidity
If you plan on paying the tax, plan for liquidity.
This is a deferred capital gain from 2019, so you may not have cash on hand. One option to consider is refinancing the QOZ to obtain liquidity.
Speak to a QOZ Tax Attorney
If you or your clients have QOZ capital gains coming due at the end of this year, now is the time to be proactive.
Covello Tax Law works directly with entrepreneurs, investors, advisors, and business owners nationwide to create strategies that optimize what they have built. Dustin Covello is a tax attorney and strategic advisor to entrepreneurs and their professional teams. He helps clients create sophisticated, impactful strategies that reduce taxes on major liquidity events and complex business structures.
